From 89dae6b9f5753b98beaf8d597ef5686b579a748e Mon Sep 17 00:00:00 2001 From: Rebekah Hort Date: Thu, 19 Jun 2025 20:17:17 +0800 Subject: [PATCH] Add Development Ground Leases and Joint Ventures - a Primer For Owners --- ... 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..94aed40 --- /dev/null +++ b/Development Ground Leases and Joint Ventures - a Primer For Owners.-.md @@ -0,0 +1,15 @@ +
If you own property in an up-and-coming location or own [residential](https://lourealtygrp.com) or commercial property that could be redeveloped into a "greater and better usage", then you've come to the ideal place! This article will help you summarize and hopefully demystify these 2 approaches of enhancing a piece of genuine estate while participating handsomely in the advantage.
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The Development Ground Lease
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The Development Ground Lease is an agreement, usually ranging from 49 years to 150 years, where the owner transfers all the advantages and concerns of ownership (elegant legalese for future earnings and costs!) to a designer in exchange for a monthly or quarterly ground rent payment that will vary from 5%-6% of the fair market value of the residential or commercial property. It enables the owner to delight in a good return on the value of its residential or [commercial property](https://dev.worldluxuryhousesitting.com) without needing to offer it and does not require the owner itself to handle the remarkable danger and problem of building a brand-new structure and finding tenants to inhabit the new building, skills which [numerous realty](https://fortressrealtycr.com) owners simply do not have or desire to learn. You might have also heard that ground lease rents are "triple net" which means that the owner incurs no charges of operating of the residential or commercial property (besides earnings tax on the [received](https://jacorealty.com) rent) and gets to keep the full "net" return of the negotiated lease payments. All true! Put another way, throughout the regard to the ground lease, the developer/ground lease renter, handles all responsibility for real estate taxes, building and construction expenses, obtaining expenses, repair work and upkeep, and all running costs of the dirt and the [brand-new building](https://fashionweekvenues.com) to be constructed on it. right. There's more!
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This ground lease structure also allows the owner to take pleasure in a sensible return on the present worth of its residential or commercial property WITHOUT needing to sell it, WITHOUT paying capital gains tax and, under existing law, WITH a tax basis step-up (which lowers the amount of gain the owner would ultimately pay tax on) when the owner dies and ownership of the residential or commercial property is moved to its successors. All you offer up is control of the residential or commercial property for the term of the lease and a higher involvement in the revenues obtained from the new building, but without the majority of the risk that opts for structure and running a new structure. More on risks later on.
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To make the deal sweeter, most ground leases are structured with regular increases in the ground rent to protect against inflation and also have fair market price ground rent "resets" every 20 or so years, so that the owner gets to enjoy that 5%-6% return on the future, ideally increased worth of the residential or commercial property.
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Another positive characteristic of a development ground lease is that as soon as the new [building](https://lourealtygrp.com) has actually been built and leased up, the property owner's ownership of the residential or commercial property consisting of the rental stream from the ground lease is a sellable and financeable interest in property. At the very same time, the designer's rental stream from operating the residential or commercial property is also sellable and financeable, and if the lease is drafted correctly, either can be offered or funded without danger to the other party's interest in their residential or commercial property. That is, the owner can borrow money versus the worth of the ground leas paid by the designer without impacting the developer's ability to fund the structure, and vice versa.
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So, what are the disadvantages, you may ask. Well initially, the owner offers up all control and all possible profits to be originated from building and operating a brand-new structure for between 49 and 150 years in exchange for the security of restricted ground lease. Second, there is danger. It is primarily front-loaded in the lease term, however the danger is real. The minute you move your residential or commercial property to the developer and the old building gets destroyed, the residential or commercial property no longer is leasable and won't be generating any income. That will last for 2-3 years until the brand-new structure is developed and totally tenanted. If the designer stops working to develop the building or stops halfway, the owner can get the residential or commercial property back by cancelling the lease, however with a partly built structure on it that produces no income and worse, will cost millions to complete and lease up. That's why you must make absolutely sure that whoever you lease the residential or commercial property to is a skilled and experienced home builder who has the monetary wherewithal to both pay the ground lease and finish the building and construction of the structure. Complicated legal and organization options to offer defense against these threats are beyond the scope of this post, but they exist and need that you find the right company 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](https://dev.worldluxuryhousesitting.com) lease with restricted participation and restricted advantage? Do you desire to leverage your ownership of an undeveloped or underdeveloped piece of residential or commercial property into an interesting, new, larger and much better investment? Then perhaps a development joint venture is for you. In an advancement joint venture, the owner contributes ownership of the residential or commercial property to a restricted liability company whose owners (members) are the owner and the developer. The owner trades its ownership of the land in exchange for a percentage ownership in the joint endeavor, which portion is identified by dividing the fair market value of the land by the total project expense of the new structure. So, for instance, if the value of the land is $ 3million and it will cost $21 million to build the new structure 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 participate in 12.5% of the operating revenues, any refinancing earnings, and the profit on sale.
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There is no income tax or state and local transfer tax on the contribution of the residential or commercial property to the joint endeavor and for now, a basis step up to reasonable market price is still offered to the owner of the 12.5% joint endeavor interest upon death. Putting the joint endeavor together raises many [questions](https://vreaucazare.ro) that must be worked out and dealt with. For instance: 1) if more cash is needed to complete the structure than was originally budgeted, who is responsible to come up with the additional funds? 2) does the owner get its $3mm dollars returned first (a concern circulation) 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 manage the daily service choices? or major choices like when to re-finance or sell the new structure? 5) can either of the members transfer their interests when desired? or 6) if we develop condos, can the members take their earnings out by getting ownership of particular homes or retail areas rather of cash? There is a lot to unpack in putting a strong and reasonable joint endeavor contract together.
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And after that there is a threat analysis to be done here too. In the advancement joint venture, the now-former residential or commercial property owner no longer owns or controls the dirt. The owner has actually gotten a 12.5% [MINORITY](https://hvm-properties.com) interest in the operation, albeit a bigger task than previously. The risk of a failure of the task does not just lead to the termination of the ground lease, it might result in a foreclosure and possibly overall loss of the residential or commercial property. And after that there is the possibility that the marketplace for the brand-new building isn't as strong as initially predicted and the brand-new building does not produce the level of rental income that was expected. Conversely, the building gets constructed on time, on or under budget plan, into a robust leasing market and it's a home run where the value of the 12.5% joint venture interest far exceeds 100% of the worth of the undeveloped parcel. The taking of these risks can be substantially decreased by picking the exact same proficient, experience and economically strong developer partner and if the expected benefits are large enough, a well-prepared residential or commercial property owner would be more than warranted to handle those risks.
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What's an Owner to Do?
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My very first piece of guidance to anyone considering the redevelopment of their residential or commercial property is to surround themselves with skilled specialists. Brokers who comprehend development, accounting professionals and other financial advisors, development specialists who will deal with behalf of an owner and naturally, great skilled legal counsel. My second piece of suggestions is to utilize those specialists to determine the economic, market and legal dynamics of the possible [transaction](https://www.jandhproperty.com). The dollars and the deal potential will drive the choice to establish or not, and the structure. My third piece of advice to my clients is to be true to themselves and attempt to come to a sincere awareness about the level of threat they will want to take, their capability to discover the right developer partner and after that trust that designer to manage this process for both celebration's mutual economic benefit. More easily said than done, I can assure you.
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Final Thought
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Both of these structures work and have for years. They are particularly popular now since the cost of land and the expense of building materials are so pricey. The magic is that these advancement ground leases, and joint endeavors supply a cheaper way for a developer to manage and redevelop a piece of residential or commercial property. More economical because the ground lease a designer pays the owner, or the earnings the designer shares with a joint endeavor partner is either less, less dangerous or both, than if the designer had actually bought the land outright, which's a good idea. These are [sophisticated transactions](https://marakicity.com) that demand advanced experts working on your behalf to keep you safe from the threats 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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