What are the pros and cons of ground leases?

How do you know if/when it's a good deal? Is it a good first-time commercial real estate buy? And, is financing tough for these types of investments?
In General Area - Asked by Brittany S. - Jan 12, 2011
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Answer(s)

Rob B.
Chandler, AZ

Brittany....
As a ground-lessee, a ground lease may be a good deal if you have many or all of the elements that follow:
1. A credit tenant or credit tenants in a multi-tenant property.
2. A lease of 30 years or more
3. A dense location creating higher income from the improvement’s rents.
4. No large periodic increases in the ground-lease rate to be charged over the term.
5. A building that may have remaining life in it at the end of the lease term.
6. Purchase of the improvement at a cap rate on the NOI that is at least 200 basis points above fee-comparables for similar properties.
There are a couple of significant additional thoughts that I can offer.
1. A building with an underlying ground-lease has greater tax benefits, because your investment will be 100% depreciable over the life of the improvement’s depreciation schedule.
2. Be aware that when you intend to sell your property that it will have a more limited market than you even have at purchase, because the questions you have about a ground lease will still exist and the lease will be shorter than it was at the time of purchase. (This is why there is a premium on the cap rate. That premium will grow as the ground-lease term grows shorter. At some point someone will not even want to buy the property with a ground lease, if there is a short fuse on the term).
In summary, the real benefit of a ground-lease is the income it produces.
With regard to your last question, yes there is financing for these types of investment. However, that financing is likely to be conditioned on all the elements I have expressed.
Good luck Brittany..... Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: rob@capratecommercial.com

Jan 12, 2011
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Rob M.
Lender/Mortgage Broker
Houston, TX

Basic Pros: Lease can be written off as course of doing business. Most qualified leasehold improvements can be depreciated.
Basic Cons: You don't own anything, the landlord does.
Lenders are less apt to lend without considerable equity that is not based on any leashold improvements. SBA has programs that are available for this situation. Go to a local bank as opposed to the national ones. They know the area and are more likely to help.
Rob M

Jan 13, 2011
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Steve J.
Owner/Investor
Irvine, CA

Simple answer is:
Pros: You own the land (I think on e of the other answers is talking about purchasing a leasehold interest, not a ground lease). Very secure and stable investment. If the tenant stops paying, you get the building.
Cons: You have nothing to depreciate so you have a tax liability for the entire lease amount. Also, on a resale your buyer pool is limited.
As a general rule, I would shy away from a ground lease as a first time investment, mainly because of the tax liability.

Jan 18, 2011
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Catherine R.
Owner/Investor
London, LN

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Jan 22, 2011
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Natalie F.
Owner/Investor
Wesley Chapel, FL

Many good responses. Make sure you understand lender subordination clauses and improvement reversions at the end of the term (or cost to remove if you prefer)as well as what happens to the tenant's lease triggers and redirection of rents in the event of default of the land owner and/or default of the owner of the improvements. Also, what if the tenant becomes delenquent or files for bankruptcy, what rights do you have to re-lease or liquidate the asset?
As for a first time commercial investment, it's an advanced transaction because you don't know what you don't know. But, it's fine as long as you have an experienced ground lease lawyer, lender and cpa. Get the best partners in the business.

Feb 3, 2011
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gael s.
Broker/Agent
Auburn, MA

Hi there,
I think commercial real estate is truly a good deal

Apr 8, 2013
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Mark L.
Broker/Agent
Auburn, MA

Hi Brittany,
For making deal for ground leases there are a number of things you'll want to take into consideration. In buying commercial real estate, timing is a key factor in assuring the success of the investment. Buying a commercial property at 'just the right time' maximizes profitability and capital gains and seems to be at the cusp of a rise. To finance a commercial property conventionally, the lender must feel that the deal and the borrower are appropriate.

Apr 11, 2013
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Mark L.
Broker/Agent
Auburn, MA

Hi Brittany,
For making deal for ground leases there are a number of things you'll want to take into consideration. In buying commercial real estate, timing is a key factor in assuring the success of the investment. Buying a commercial property at 'just the right time' maximizes profitability and capital gains and seems to be at the cusp of a rise. To finance a commercial property conventionally, the lender must feel that the deal and the borrower are appropriate.

Apr 11, 2013
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