What is a Ground Lease? (#1) · Issues · Franchesca Vincent / jghills

What is a Ground Lease?

Do you own land, maybe with dilapidated residential or commercial property on it? One method to extract value from the land is to sign a ground lease. This will allow you to earn earnings and potentially capital gains. In this article, 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), an occupant develops 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 throughout the lease duration. The inherited improvements 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 ready land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must 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 throughout the lease duration. That control reverts to the owner/lessor upon the expiration of the lease.

Apply For Financing

Ground Lease Subordination

One crucial aspect of a ground lease is how the lessee will fund enhancements to the land. An essential arrangement is whether the property manager will accept subordinate his priority on claims if the lessee defaults on its debt.

That's precisely what takes place in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the loan provider if the lessee defaults. In return, the property owner requests for greater lease on the residential or commercial property.

Alternatively, an unsubordinated ground lease maintains the property manager's leading concern claims if the leaseholder defaults on his payments. However this may prevent lenders, who wouldn't have the ability to occupy in case of default. Accordingly, the property owner will generally 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 parts that enter into structuring a ground lease:

1. Term

The lease should be sufficiently long to enable the lessee to amortize the expense of the enhancements it makes. To put it simply, the lessee needs to make adequate profits during the lease to pay for the lease and the enhancements. Furthermore, the lessee must make a sensible return on its financial investment after paying all costs.

The biggest chauffeur of the lease term is the funding that the lessee organizes. 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 periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying rent, a ground lease has numerous unique features.

For instance, when the lease ends, what will occur to the improvements? The lease will define whether they revert to the lessor or the lessee should eliminate them.

Another function is for the lessor to assist the lessee in getting needed licenses, permits and zoning variations.

3. Financeability

The loan provider needs to have recourse to secure its loan if the lessee defaults. This is challenging in an unsubordinated ground lease since the lessor has first concern when it comes to default. The lender only deserves to claim the leasehold.

However, one solution is a stipulation that requires the follower lessee to utilize the loan provider to fund the new GL. The topic of financeability is intricate and your legal professionals will need to learn the numerous intricacies.

Bear in mind that Assets America can assist fund the construction or renovation of industrial residential or commercial property through our network of personal investors and banks.

4. Title Insurance

The lessee should organize title insurance coverage for its leasehold. This needs special recommendations to the routine owner's policy.

5. Use Provision

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

The lessor may have the right to consent in any new function for the residential or . However, the lender will look for to restrict this right. If the lessor feels strongly about forbiding particular uses for the residential or commercial property, it needs to specify them in the lease.

6. Casualty and Condemnation

The lending institution controls insurance profits stemming from casualty and condemnation. However, this may clash with the standard wording of a ground lease, which offers some control to the lessor.

Unsurprisingly, lenders want the insurance coverage continues to approach the loan, not residential or commercial property remediation. Lenders also need that neither lessors nor lessees can end ground leases due to a casualty without their authorization.

Regarding condemnation, lending institutions firmly insist upon participating in the proceedings. The lending institution's requirements for using the condemnation earnings and managing termination rights mirror those for casualty events.

7. Leasehold Mortgages

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

If there is a preexisting mortgage, the mortgagee should agree to an SNDA arrangement. Usually, the GL loan provider wants very first priority concerning subtenant defaults.

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

Lessees want the right to obtain a leasehold mortgage without the lender's permission. Lenders want the GL to act as security should 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 wish to limit the kind of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase rents after defined durations so that it preserves market-level leas. A "ratchet" boost offers the lessee no defense in the face of a financial 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' idea is to offer decommissioned shipping containers as an ecologically friendly option to conventional construction. The 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 4 5-year options to extend.

This gives the GL an optimal term of 30 years. The lease escalation stipulation offered for a 10% lease increase every 5 years. The lease value was just under $1 million with a cap rate of 5.21%.

The initial 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 benefits of a ground lease consist of:

Affordability: Ground leases enable renters to develop on residential or commercial property that they can't afford to purchase. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This enables them to grow without saddling the business with too much financial obligation. No Down Payment: Lessees do not have to put any money to take a lease. This stands in stark contrast to residential or commercial property getting, which may need as much as 40% down. The lessee gets to save cash it can deploy elsewhere. It likewise enhances its return on the leasehold financial investment. Income: The lessor receives a stable stream of earnings while maintaining ownership of the land. The lessor preserves the worth of the income through making use of an escalation clause in the lease. This entitles the lessor to increase rents regularly. Failure to pay lease gives the lessor the right to evict the renter.

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 received capital gains treatment. Instead, it will pay regular 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 restrict the lessor from obtaining versus its equity in the land during the ground lease term.

Ground Lease Calculator

This is a fantastic industrial lease calculator. You go into the location, rental rate, and representative's fee. It does the rest.

How Assets America Can Help

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

We can help fund the purchase, building, or renovation of industrial residential or commercial property through our network of private financiers and banks. For the very 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 likewise consist of outright leases, percentage leases, and the subject of this article, ground leases. All of these leases offer benefits and drawbacks to the lessor and lessee.

- Who pays residential or commercial property taxes on a ground lease?

Typically, ground leases are triple internet. That indicates that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor becomes 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 very first is that the lessor seizes all improvements that the lessee made during the lease. The second is that the lessee needs to demolish the improvements it made.

- The length of time do ground leases generally last?

Typically, a ground lease term extends to 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 rents extend as far as 99 years.
athome.de

Do you own land, maybe with dilapidated residential or commercial property on it? One method to extract value from the land is to sign a ground lease. This will allow you to earn earnings and potentially capital gains. In this article, 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), an occupant develops 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 throughout the lease duration. The inherited improvements 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 ready land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must destroy. 
 The GL specifies who owns the land and the enhancements, i.e., residential or [commercial property](https://theeasternacres.com) that the lessee constructs. Typically, the lessee controls and diminishes the improvements throughout the lease duration. That control [reverts](https://housesites.in) to the owner/lessor upon the expiration of the lease. 
 Apply For Financing 
 Ground Lease Subordination 
 One crucial aspect of a ground lease is how the lessee will fund enhancements to the land. An essential arrangement is whether the property manager will accept subordinate his priority on claims if the lessee defaults on its debt. 
 That's precisely what takes place in a subordinated ground lease. Thus, the residential or commercial property deed becomes collateral for the loan provider if the lessee defaults. In return, the property owner requests for greater lease on the residential or commercial property. 
 Alternatively, an unsubordinated ground lease maintains the property manager's leading concern claims if the leaseholder defaults on his payments. However this may prevent lenders, who wouldn't have the ability to occupy in case of default. Accordingly, the property owner will generally charge lower rent on [unsubordinated](https://www.ilfarmandrecland.com) ground leases. 
 How to Structure a Ground Lease 
 A ground lease is more complex than routine commercial leases. Here are some parts that enter into structuring a ground lease: 
 1. Term 
 The lease should be sufficiently long to enable the lessee to amortize the expense of the enhancements it makes. To put it simply, the lessee needs to make adequate profits during the lease to pay for the lease and the [enhancements](https://www.agentjill.com). Furthermore, the lessee must make a sensible return on its financial investment after paying all costs. 
 The biggest chauffeur of the lease term is the funding that the lessee organizes. 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 periods might have a 20-year lease term. 
 2. Rights and Responsibilities 
 Beyond the arrangements for paying rent, a ground lease has numerous unique features. 
 For instance, when the lease ends, what will occur to the improvements? The lease will define whether they revert to the lessor or the lessee should eliminate them. 
 Another [function](https://sigmarover.com) is for the lessor to assist the lessee in getting needed licenses, permits and zoning variations. 
 3. Financeability 
 The loan provider needs to have recourse to secure its loan if the lessee defaults. This is challenging in an unsubordinated ground lease since the lessor has first concern when it comes to default. The lender only deserves to claim the leasehold. 
 However, one solution is a stipulation that requires the follower lessee to utilize the loan provider to fund the new GL. The topic of financeability is intricate and your legal professionals will need to learn the numerous intricacies. 
 Bear in mind that Assets America can assist fund the construction or renovation of industrial residential or commercial property through our network of personal investors and banks. 
 4. Title Insurance 
 The lessee should organize title insurance coverage for its leasehold. This needs special recommendations to the routine owner's policy. 
 5. Use Provision 
 Lenders want the broadest usage arrangement in the lease. Basically, the [provision](https://salonrenter.com) would enable any legal purpose for the residential or commercial property. In this method, the loan provider can more quickly sell the leasehold in case of default. 
 The lessor may have the right to consent in any new function for the residential or . However, the lender will look for to restrict this right. If the lessor feels strongly about forbiding particular uses for the residential or commercial property, it needs to specify them in the lease. 
 6. Casualty and Condemnation 
 The lending institution controls insurance profits stemming from casualty and condemnation. However, this may clash with the standard wording of a ground lease, which offers some control to the lessor. 
 Unsurprisingly, lenders want the insurance coverage continues to approach the loan, not residential or commercial property [remediation](https://cubicbricks.com). Lenders also need that neither lessors nor lessees can end ground leases due to a casualty without their authorization. 
 Regarding condemnation, lending institutions firmly insist upon participating in the proceedings. The lending institution's requirements for using the condemnation earnings and managing termination rights mirror those for casualty events. 
 7. Leasehold Mortgages 
 These are mortgages financing the lessee's improvements to the ground lease residential or commercial property. Typically, lenders balk at lessor's maintaining an unsubordinated position with respect to default. 
 If there is a preexisting mortgage, the mortgagee should agree to an SNDA arrangement. Usually, the GL loan provider wants very first priority concerning subtenant defaults. 
 Moreover, lenders require that the ground lease remains in force if the lessee defaults. If the lessor sends a notification of default to the lessee, the lending institution should get a copy. 
 Lessees want the right to obtain a leasehold mortgage without the lender's permission. Lenders want the GL to act as security should the lessee default. 
 Upon foreclosure of the residential or [commercial](https://housingbuddy.in) property, the lender gets the lessee's leasehold interest in the residential or commercial property. Lessors might wish to limit the kind of entity that can hold a leasehold mortgage. 
 8. Rent Escalation 
 Lessors want the right to increase rents after defined durations so that it preserves market-level leas. A "ratchet" boost offers the lessee no [defense](https://ethiopiarealty.com) in the face of a financial 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' idea is to offer decommissioned shipping containers as an ecologically friendly option to conventional construction. The 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 4 5-year options to extend. 
 This gives the GL an optimal term of 30 years. The lease escalation [stipulation offered](https://www.jukiwa.co.ke) for a 10% lease increase every 5 years. The lease value was just under $1 million with a cap rate of 5.21%. 
 The initial 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 benefits of a ground lease consist of: 
 Affordability: Ground leases enable renters to develop on residential or commercial property that they can't afford to purchase. Large store like Starbucks and Whole Foods utilize ground leases to expand their empires. This enables them to grow without saddling the business with too much financial obligation.
No Down Payment: Lessees do not have to put any money to take a lease. This stands in stark contrast to residential or commercial property getting, which may need as much as 40% down. The lessee gets to save cash it can deploy elsewhere. It likewise enhances its return on the leasehold financial investment.
Income: The lessor receives a stable stream of earnings while maintaining ownership of the land. The lessor preserves the worth of the income through making use of an escalation clause in the lease. This entitles the lessor to increase rents regularly. Failure to pay lease gives the lessor the right to evict the renter. 
 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 received capital gains treatment. Instead, it will pay regular 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 restrict the lessor from obtaining versus its equity in the land during the ground lease term. 
 Ground Lease Calculator 
 This is a fantastic industrial lease calculator. You go into the location, rental rate, and representative's fee. It does the rest. 
 How Assets America Can Help 
 Assets America ® will arrange financing for industrial tasks beginning at $20 million, without any ceiling. We invite you to call us for more details about our total financial services. 
 We can help fund the purchase, building, or renovation of industrial residential or commercial property through our network of private financiers and banks. For the very 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 likewise consist of outright leases, percentage leases, and the subject of this article, ground leases. All of these leases offer benefits and drawbacks to the lessor and lessee. 
 - Who pays residential or commercial property taxes on a ground lease? 
 Typically, ground leases are triple internet. That indicates that the lessee pays the residential or commercial property taxes throughout the lease term. Once the lease ends, the lessor becomes 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 very first is that the lessor seizes all improvements that the lessee made during the lease. The second is that the lessee needs to demolish the [improvements](https://thailandproperty.com) it made. 
 - The length of time do ground leases generally last? 
 Typically, a ground lease term extends to 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 rents extend as far as 99 years. [athome.de](https://www.athome.de/en/buy)