This is often done if the landowner is using the land as collateral in a transaction to finance improvements. A subordinated ground lease is risky, but the upside is that it allows landowners to charge more and get more favorable terms in compensation for the higher risk. With an unsubordinated land lease, the landowner retains top priority for all claims on the property. If the tenant defaults, then the landowner retains ownership of the land, not the lender.
This type of land lease offers more protection to the landowner, but is riskier for lenders, so it may be more difficult to get financing for an unsubordinated land lease.
In most cases, the yield of a land lease is lower than other types of leases because of the restricted cash flow. However, it can provide a safe, steady cash flow. With the right tenant, it can be a mutually-beneficial partnership! Just like any type of lease you have, you want to be able to track your land leases in order to account for your portfolio cash flow. However, you also want to be able to account for the asset of the land as well. See what it can do for your commercial real estate business by scheduling a demo today.
This site uses Akismet to reduce spam. They are: subordinated and unsubordinated. That is beneficial to the lessee because it can increase their chances of getting a construction loan.
However, a subordinated land lease agreement can be risky for the owner. If the lessee defaults on his or her construction loan, the loan could result in foreclosure , and the owner could lose his or her title to the commercial real estate property itself.
Due to the riskiness for the owner, he or she may demand an increase in rental fees for the land lease and impose stricter control over the lease transactions.
With an unsubordinated land lease agreement, the landowner does not permit the property to be used for a leasehold mortgage. That means there is no risk of foreclosure, so it is a safer option for landowners.
The terms for these leases tend to last 99 years with the option of a year extension. If the term runs out in, say, 10 years, the buyer may have trouble getting a or year mortgage.
The co-op or condo board will typically try to renew the lease. But this typically requires renegotiating terms. That could mean a substantial hike in ground rent and, therefore, in maintenance or common charges. In addition, the condo or co-op could try to buy the land from the landowner.
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