From b5c3483a69860bd045fd04070f66e25a1df314ca Mon Sep 17 00:00:00 2001 From: Vernon Dockery Date: Wed, 18 Jun 2025 06:40:14 +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..08fdba8 --- /dev/null +++ b/Development Ground Leases and Joint Ventures - a Primer For Owners.-.md @@ -0,0 +1,15 @@ +
If you own real estate in an up-and-coming location or own residential or commercial property that might be redeveloped into a "higher and much better use", then you have actually come to the right place! This post will assist you sum up and hopefully demystify these two methods of improving a piece of realty while taking part handsomely in the upside.
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The Development Ground Lease
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The Development Ground Lease is a contract, normally ranging from 49 years to 150 years, where the owner transfers all the benefits and concerns of ownership (fancy legalese for future profits and expenses!) to a designer in exchange for a regular monthly or quarterly ground lease payment that will range from 5%-6% of the fair market price of the residential or commercial property. It allows the owner to delight in a good return on the worth of its residential or commercial property without needing to sell it and doesn't require the owner itself to take on the tremendous risk and problem of building a brand-new structure and finding renters to inhabit the brand-new building, abilities which numerous realty owners simply do not have or desire to learn. You might have also heard that ground lease rents are "triple internet" which suggests that the owner incurs no charges of operating of the residential or commercial property (aside from income tax on the received rent) and gets to keep the full "net" return of the worked out rent payments. All real! Put another way, throughout the term of the ground lease, the developer/ground lease tenant, takes on all obligation for genuine estate taxes, building expenses, obtaining expenses, repair work and maintenance, and all operating expenses of the dirt and the brand-new building to be developed on it. Sounds quite excellent right. There's more!
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This ground lease structure likewise enables the owner to take pleasure in a reasonable return on the current worth of its residential or commercial property WITHOUT having 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 passes away and ownership of the residential or commercial property is transferred to its heirs. All you quit is control of the residential or commercial property for the term of the lease and a higher participation in the profits stemmed from the new structure, however without the majority of the risk that chooses structure and operating a brand-new building. More on [threats](https://www.roomsandhouses.nl) later on.
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To make the deal sweeter, many ground leases are structured with periodic boosts in the ground lease to protect against inflation and likewise have [reasonable market](https://pl-property.com) price ground rent "resets" every 20 approximately 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 attribute of a development ground lease is that as soon as the new structure has been built and leased up, the property owner's ownership of the residential or commercial property including the rental stream from the ground lease is a sellable and financeable interest in genuine estate. At the very same time, the developer's rental stream from running the residential or commercial property is likewise sellable and financeable, and if the lease is prepared correctly, either can be sold or financed without risk to the other [celebration's](https://realestatescy.com) interest in their residential or commercial property. That is, the owner can borrow money versus the value of the ground rents paid by the developer without affecting the designer's ability to finance the structure, and vice versa.
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So, what are the disadvantages, you may ask. Well first, the owner quits all control and all possible earnings to be obtained from structure and running a brand-new building for between 49 and 150 years in exchange for the security of restricted ground lease. Second, there is risk. It is predominantly front-loaded in the lease term, but the risk is real. The minute you move your residential or commercial property to the developer and the old structure gets destroyed, the residential or commercial property no longer is leasable and will not be producing any profits. That will last for 2-3 years until the brand-new structure is constructed and totally tenanted. If the designer stops working to develop the structure or stops halfway, the owner can get the residential or commercial property back by cancelling the lease, but with a partly constructed building on it that produces no revenue and worse, will cost millions to end up and rent up. That's why you should make absolutely sure that whoever you rent the residential or commercial property to is an experienced and [knowledgeable builder](https://magnoliasresidence.com) who has the monetary [wherewithal](https://shofle.com) to both pay the ground rent and complete the building and construction of the building. Complicated legal and company services to provide security versus these dangers are beyond the scope of this article, however they exist and need that you find the best organization advisors and legal counsel.
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The Development Joint Venture
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Not pleased with a boring, coupon-clipping, long-term ground lease with minimal involvement and limited benefit? Do you wish to take advantage of your ownership of an undeveloped or underdeveloped piece of residential or commercial property into an amazing, new, larger and better investment? Then possibly a development joint venture is for you. In a development joint endeavor, the owner contributes ownership of the residential or commercial property to a limited liability business 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 endeavor, which portion is figured out by dividing the reasonable market value of the land by the overall job cost of the new structure. So, for instance, if the value of the land is $ 3million and it will cost $21 million to build the brand-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 new structure and will take part in 12.5% of the operating revenues, any refinancing profits, and the earnings 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 venture interest upon death. Putting the joint endeavor together raises many [concerns](https://www.properush.com) that need to be negotiated and solved. For instance: 1) if more money is needed to complete the structure than was originally budgeted, who is accountable to come up with the [extra funds](http://cuulonghousing.com.vn)? 2) does the owner get its $3mm dollars [returned initially](https://salonrenter.com) (a top priority 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 control the day-to-day business decisions? or significant decisions like when to refinance or sell the brand-new building? 5) can either of the members transfer their interests when wanted? or 6) if we build condominiums, can the members take their earnings out by getting ownership of particular homes or retail spaces rather of cash? There is a lot to unload in putting a strong and fair joint venture agreement together.
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And then there is a threat analysis to be done here too. In the development joint endeavor, the now-former residential or commercial property owner no longer owns or manages the dirt. The owner has gotten a 12.5% MINORITY interest in the operation, albeit a larger project than previously. The threat of a failure of the [project](https://realzip.com.au) does not simply lead to the termination of the ground lease, it might lead to a [foreclosure](https://www.aws-properties.com) and perhaps overall loss of the residential or commercial property. And then there is the possibility that the [marketplace](https://shofle.com) for the brand-new building isn't as strong as initially forecasted and the new building does not generate the level of rental income that was [expected](https://onestopagency.org). Conversely, the building gets developed 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 value of the undeveloped parcel. The taking of these dangers can be significantly reduced by [choosing](https://vreaucazare.ro) the same qualified, experience and economically strong designer partner and if the expected benefits are big enough, a well-prepared residential or commercial property owner would be more than justified to handle those risks.
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What's an Owner to Do?
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My first piece of guidance to anyone considering the redevelopment of their residential or commercial property is to surround themselves with knowledgeable experts. Brokers who comprehend development, accountants and other financial advisors, advancement experts who will deal with behalf of an owner and naturally, good experienced legal counsel. My second piece of recommendations is to make use of those professionals to figure out the economic, market and legal characteristics of the possible transaction. The dollars and the deal capacity will drive the decision to establish or not, and the structure. My 3rd piece of advice to my customers is to be true to themselves and attempt to come to a sincere about the level of threat they will be ready to take, their ability to find the best designer partner and after that trust that developer to control this procedure for both celebration's mutual economic advantage. More quickly said than done, I can ensure you.
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Final Thought
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Both of these structures work and have for years. They are especially popular now since the expense of land and the cost of building materials are so pricey. The magic is that these advancement ground leases, and joint ventures offer a less costly way for a developer to control and [redevelop](https://www.redmarkrealty.com) a piece of residential or commercial property. Less pricey because the ground lease a developer pays the owner, or the revenue 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, and that's an advantage. These are advanced transactions that require advanced specialists dealing with your behalf to keep you safe from the threats fundamental in any redevelopment of realty and guide you to the increased worth in your residential or commercial property that you look for.
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