From 2dea61187aa039257f933eb43068d350d5c47ada Mon Sep 17 00:00:00 2001 From: Kisha Wiese Date: Fri, 13 Jun 2025 15:50:07 +0200 Subject: [PATCH] Add 'Development Ground Leases and Joint Ventures - a Primer For Owners' --- ...es-and-Joint-Ventures---a-Primer-For-Owners.md | 15 +++++++++++++++ 1 file changed, 15 insertions(+) create mode 100644 Development-Ground-Leases-and-Joint-Ventures---a-Primer-For-Owners.md diff --git a/Development-Ground-Leases-and-Joint-Ventures---a-Primer-For-Owners.md b/Development-Ground-Leases-and-Joint-Ventures---a-Primer-For-Owners.md new file mode 100644 index 0000000..c84c51f --- /dev/null +++ b/Development-Ground-Leases-and-Joint-Ventures---a-Primer-For-Owners.md @@ -0,0 +1,15 @@ +
If you own genuine estate in an up-and-coming area or own [residential](https://realtyonegroupsurf.com) or commercial property that might be redeveloped into a "higher and better usage", then you've pertained to the best location! This post will assist you sum up and ideally debunk these 2 approaches of improving a piece of real estate while taking part handsomely in the benefit.
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The Development Ground Lease
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The Development Ground Lease is an agreement, typically ranging from 49 years to 150 years, where the owner transfers all the advantages and concerns of ownership (elegant legalese for future profits and expenses!) to a developer in exchange for a regular monthly or quarterly ground rent payment that will range from 5%-6% of the reasonable market value of the residential or commercial property. It permits the owner to take pleasure in an excellent return on the worth of its residential or commercial property without needing to sell it and does not require the owner itself to handle the significant danger and issue of building a new structure and finding renters to occupy the brand-new structure, skills which lots of genuine estate owners simply do not have or wish to learn. You might have also heard that ground lease rents are "triple internet" which implies that the owner sustains no charges of operating of the residential or commercial property (other than earnings tax on the gotten lease) and gets to keep the full "net" return of the negotiated lease payments. All true! Put another way, during the term of the ground lease, the developer/ground lease renter, handles all duty genuine estate taxes, building and construction expenses, borrowing expenses, repairs and upkeep, and all operating costs of the dirt and the new building to be built on it. Sounds quite excellent right. There's more!
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This ground lease structure also permits the owner to enjoy a sensible return on the existing worth of its residential or commercial property WITHOUT needing to sell it, WITHOUT paying capital gains tax and, under present law, WITH a tax basis step-up (which decreases the quantity of gain the owner would ultimately pay tax on) when the owner passes away and ownership of the residential or commercial property is transferred to its successors. All you quit is control of the residential or commercial property for the regard to the lease and a greater participation in the earnings stemmed from the new structure, however without the majority of the risk that opts for building and operating a brand-new structure. More on risks later on.
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To make the offer sweeter, most ground leases are structured with regular increases in the ground rent to secure versus inflation and also have fair market price ground lease "resets" every 20 or so years, so that the owner gets to enjoy that 5%-6% return on the future, hopefully increased value of the residential or commercial property.
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Another favorable characteristic of an advancement ground lease is that once the brand-new building has actually been developed and rented up, the landlord's ownership of the residential or commercial property including the rental stream from the ground lease is a sellable and financeable interest in property. At the very same time, the developer's rental stream from running the residential or commercial property is also sellable and financeable, and if the lease is drafted appropriately, either can be offered or funded without risk to the other celebration's interest in their residential or [commercial property](https://trianglebnb.com). That is, the owner can obtain cash versus the worth of the ground rents paid by the developer without impacting the designer's capability to fund the building, and vice versa.
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So, what are the downsides, you might ask. Well initially, the owner quits all control and all potential profits to be originated from building and running a new structure for in between 49 and 150 years in exchange for the security of minimal ground rent. Second, there is threat. It is primarily front-loaded in the lease term, but the risk is real. The minute you transfer your residential or commercial property to the designer and the old structure gets destroyed, the residential or commercial property no longer is leasable and will not be generating any earnings. That will last for 2-3 years until the brand-new building is developed and fully tenanted. If the developer stops working to build the structure or stops midway, the owner can get the residential or commercial property back by cancelling the lease, but with a partly constructed structure on it that generates no revenue and even worse, will cost millions to complete and lease up. That's why you should make absolutely sure that whoever you lease the residential or commercial property to is a [knowledgeable](https://salonrenter.com) and experienced builder who has the financial wherewithal to both pay the [ground lease](https://blue-shark.ae) and finish the building of the building. Complicated legal and solutions to offer protection against these threats are beyond the scope of this article, however they exist and need that you discover the best service consultants and legal counsel.
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The Development Joint Venture
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Not pleased with a boring, coupon-clipping, long-lasting ground lease with minimal involvement and restricted benefit? Do you wish to take advantage of your ownership of an undeveloped or underdeveloped piece of residential or commercial property into an exciting, brand-new, larger and much better investment? Then possibly a development joint venture is for you. In a development joint venture, the owner contributes ownership of the residential or commercial property to a minimal [liability business](https://housingbuddy.in) whose owners (members) are the owner and the designer. The owner trades its ownership of the land in exchange for a percentage ownership in the joint venture, which percentage is determined by dividing the fair market price of the land by the overall task cost of the brand-new building. So, for example, if the value of the land is $ 3million and it will cost $21 million to construct the new building and lease it up, the owner will be credited with a 12.5% ($3mm divided by $24mm) interest in the entity that owns the brand-new building and will take part in 12.5% of the operating profits, any refinancing proceeds, and the revenue on sale.
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There is no earnings tax or state and local [transfer tax](https://www.ilfarmandrecland.com) on the contribution of the residential or commercial property to the joint endeavor and in the meantime, a basis step up to reasonable market value is still available to the owner of the 12.5% joint venture interest upon death. Putting the joint endeavor together raises many concerns that need to be worked out and fixed. For example: 1) if more money is required to end up the structure than was initially budgeted, who is accountable to come up with the additional funds? 2) does the owner get its $3mm dollars returned first (a concern distribution) or do all dollars come out 12.5%:87.5% (professional rata)? 3) does the owner get a guaranteed return on its $3mm financial investment (a preference payment)? 4) who gets to control the daily service choices? or major choices like when to re-finance or sell the brand-new building? 5) can either of the members transfer their interests when preferred? or 6) if we develop condos, can the members take their profit out by getting ownership of specific homes or retail spaces instead of cash? There is a lot to unpack in putting a strong and fair joint venture contract together.
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And after that there is a risk analysis to be done here too. In the advancement joint endeavor, the now-former residential or commercial property owner no longer owns or controls the dirt. The owner has gotten a 12.5% MINORITY interest in the operation, albeit a bigger task than before. The risk of a failure of the job doesn't just lead to the termination of the ground lease, it might lead to a foreclosure and maybe total loss of the residential or commercial property. And then there is the possibility that the market for the new building isn't as strong as initially projected and the new structure doesn't create the level of rental income that was expected. Conversely, the structure gets built on time, on or under spending plan, into a robust leasing market and it's a home run where the worth of the 12.5% joint venture interest far exceeds 100% of the value of the undeveloped parcel. The taking of these threats can be substantially lowered by choosing the same competent, experience and financially strong designer partner and if the expected advantages are big enough, a well-prepared residential or commercial property owner would be more than warranted to take on those threats.
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What's an Owner to Do?
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My very first piece of suggestions to anybody thinking about the redevelopment of their residential or commercial property is to surround themselves with skilled professionals. Brokers who comprehend development, [accountants](https://cyprus101.com) and other financial advisors, development consultants who will work on behalf of an owner and naturally, great experienced legal counsel. My second piece of advice is to use those professionals to identify the economic, market and legal characteristics of the possible deal. The dollars and the offer capacity will drive the decision to [develop](https://property-northern-cyprus.com) or not, and the structure. My 3rd piece of suggestions to my [clients](https://propcart.co.ke) is to be true to themselves and try to come to a truthful realization about the level of risk they will be willing to take, their ability to discover the ideal developer partner and then trust that designer to manage this process for both party's shared financial benefit. More quickly stated than done, I can guarantee you.
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Final Thought
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Both of these structures work and have for years. They are especially [popular](https://www.holiday-homes-online.com) now since the expense of land and the cost of building materials are so costly. The magic is that these development ground leases, and joint endeavors provide a cheaper way for a developer to manage and redevelop a piece of residential or commercial property. Less costly because the ground lease a developer pays the owner, or the earnings the developer shares with a joint endeavor partner is either less, less risky or both, than if the developer had purchased the land outright, and that's an advantage. These are advanced transactions that demand advanced specialists dealing with your behalf to keep you safe from the risks inherent in any redevelopment of realty and guide you to the increased value in your residential or commercial property that you look for.
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