Question on purchasing land with ground lease in place

Example:
A pad site is ground leased by a bank branch, who builds/owns the property and agrees to a 50 year ground lease at $100K per year with 3% annual bumps.
As the owner of the fee, you would be realizing $100K in revenue Year 1. What expenses would the fee owner have to net out of the $100K to get back to actual NOI? How would a tax bill be issued, one for improvements and one for land? Would land owner need to carry insurance?
In Buying Property - Asked by David T. - Jun 28, 2009
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Answer(s)

Jonathan S.
Broker/Agent
West Palm Beach, FL

Most ground leases are "triple net", in which the lessee pays all operating expenses. These operating expenses would include real estate taxes, insurance, and maintenance. Under this common scenario, the bank's rental payment could be calcuable as NOI, unless you choose to exclude a small percentage of the rental payment for vacancy.
I would encourage you to make further inquiries regarding the obligations of the lessee and lessor as written in the lease agreement.

Jun 28, 2009
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Robert W.
Broker/Agent
Akron, OH

As mentioned in the prior response, most ground leases of this type are fully net meaning there are no expenses to net out to arrive at the NOI. Most taxing authorities issue a single tax bill for the PARCEL which includes the land and improvements. Again, it is usually customary that the ground lease tenant pay all the taxes. As to insurance, it is customary that the lessee/tenant provide the insurance and name the ground lessor as an additional named insured. The lease document will probably also require the lessee to indemnify the ground lessor from any claims or suits. My own experience has painfully illustrated that while this is usually reliable (typically because ground leases are executed with quality credit tenants who often will have deeper pockets than the ground lessor), it is not bullet proof. In some situations, it may be advisable (or at least a good precaution) for the ground lessor to carry a backup liability policy which should be rather affordable based on the existence of the underlying insurance required to be carried by the ground lessee.

Jun 28, 2009
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Paul S.
Broker/Agent
Glendora, CA

One thing you want to keep in mind is that because you own only the land there is no depreciation. Also keep in ming that IRS rules do not allow an exchange once the lease has less than 30 years. At some point the value of the investment will be diminished because of that (however who can predict what the exchange rules will be in 20 years or even if exchanges are allowed at all down the road).

Jun 29, 2009
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