From 5f9b53d1a1a3ee9492753c6686b0d5fd0d9b2742 Mon Sep 17 00:00:00 2001 From: tammcgough0960 Date: Mon, 27 Oct 2025 20:39:10 +0800 Subject: [PATCH] Add Development Ground Leases and Joint Ventures - a Guide For Owners --- ...s and Joint Ventures - a Guide For Owners.-.md | 15 +++++++++++++++ 1 file changed, 15 insertions(+) create mode 100644 Development Ground Leases and Joint Ventures - a Guide For Owners.-.md diff --git a/Development Ground Leases and Joint Ventures - a Guide For Owners.-.md b/Development Ground Leases and Joint Ventures - a Guide For Owners.-.md new file mode 100644 index 0000000..7dcd897 --- /dev/null +++ b/Development Ground Leases and Joint Ventures - a Guide For Owners.-.md @@ -0,0 +1,15 @@ +
If you own realty in an up-and-coming location or own residential or commercial property that might be redeveloped into a "greater and much better use", then you have actually pertained to the best location! This short article will help you summarize and ideally demystify these two approaches of enhancing a piece of property while getting involved handsomely in the benefit.
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The Development Ground Lease
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The Development Ground Lease is a contract, normally varying from 49 years to 150 years, where the owner transfers all the benefits and concerns of ownership (expensive legalese for future earnings and expenses!) to a designer in exchange for a month-to-month or quarterly ground lease payment that will range from 5%-6% of the fair market worth of the residential or commercial property. It permits the owner to delight in a great return on the value of its residential or commercial property without having to sell it and doesn't need the owner itself to handle the significant risk and complication of constructing a brand-new structure and finding renters to inhabit the brand-new building, abilities which lots of realty owners simply don't have or wish to discover. You might have also heard that ground lease rents are "triple internet" which means that the owner incurs no charges of [operating](http://www.homeswitchome.com) of the residential or commercial property (other than income tax on the received rent) and gets to keep the full "net" return of the negotiated rent payments. All real! Put another method, throughout the term of the ground lease, the developer/ground lease renter, takes on all duty for real estate taxes, construction expenses, obtaining expenses, repairs and maintenance, and all [operating costs](https://patrimoniomallorca.com) of the dirt and the new building to be constructed on it. Sounds quite great right. There's more!
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This ground lease structure also permits the owner to delight in an affordable return on the present value 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 reduces 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 moved to its beneficiaries. All you quit is control of the residential or commercial property for the term of the lease and a greater participation in the revenues originated from the new building, but without the majority of the threat that opts for building and operating a brand-new structure. More on dangers later.
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To make the deal sweeter, many ground leases are structured with routine boosts in the ground lease to safeguard against inflation and also have fair market price ground lease "resets" every 20 approximately years, so that the owner gets to delight in that 5%-6% return on the future, ideally increased value of the residential or commercial property.
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Another positive quality of a development ground lease is that when the brand-new structure has 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](https://venturahomestexas.com). At the exact same time, the [developer's rental](http://affordablelistingsnyc.com) stream from [operating](https://steppingstone.online) the residential or commercial property is also sellable and financeable, and if the lease is prepared effectively, either can be offered or financed without risk to the other party's interest in their residential or commercial property. That is, the owner can obtain money versus the worth of the ground rents paid by the developer without impacting the developer's capability to finance the structure, and vice versa.
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So, what are the disadvantages, you may ask. Well initially, the owner quits all control and all possible revenues to be obtained from structure and operating a new building for between 49 and 150 years in exchange for the security of [restricted ground](https://ninetylayersreal.com) rent. Second, there is danger. It is primarily front-loaded in the lease term, however the threat is real. The minute you move your residential or commercial property to the developer and the old structure gets demolished, the residential or commercial property no longer is leasable and won't be generating any profits. That will last for 2-3 years up until the new building is constructed and fully tenanted. If the designer stops working to construct the building or stops midway, the owner can get the residential or commercial property back by cancelling the lease, however with a partially developed structure on it that generates no earnings and worse, will cost millions to complete and rent up. That's why you must make absolutely sure that whoever you rent the residential or commercial property to is a skilled and skilled home builder who has the monetary wherewithal to both pay the ground rent and finish the construction of the structure. Complicated legal and company solutions to provide defense versus these risks are beyond the scope of this article, but they exist and need that you discover the ideal service advisors 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 participation and minimal upside? Do you wish to leverage your ownership of an undeveloped or underdeveloped piece of residential or commercial property into an exciting, brand-new, larger and better financial investment? Then perhaps a development joint endeavor 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 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 price of the land by the total task expense of the new building. So, for example, 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 brand-new structure and will take part in 12.5% of the operating profits, any refinancing proceeds, 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 venture and in the meantime, a basis step up to fair market value is still offered to the owner of the 12.5% joint endeavor interest upon death. Putting the joint venture together raises various questions that should be negotiated and resolved. For example: 1) if more money is needed to finish the [building](https://havensuitesbnb.com) than was originally allocated, who is responsible to come up with the additional funds? 2) does the owner get its $3mm dollars returned initially (a priority distribution) or do all dollars come out 12.5%:87.5% (pro rata)? 3) does the owner get a guaranteed return on its $3mm financial investment (a choice payment)? 4) who gets to manage the day-to-day company decisions? or significant decisions like when to re-finance or sell the new structure? 5) can either of the members move their interests when preferred? or 6) if we construct condos, can the members take their earnings out by getting ownership of specific apartments or retail areas rather of cash? There is a lot to unpack in [putting](https://roostaustin.com) a strong and fair joint venture agreement together.
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And after that there is a threat analysis to be done here too. In the development joint venture, 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 job](https://sikeyglobal.com) than in the past. The danger of a failure of the job does not simply lead to the termination of the ground lease, it might result in a foreclosure and maybe overall loss of the residential or commercial property. And then there is the possibility that the marketplace for the new structure isn't as strong as initially forecasted and the brand-new structure does not generate the level of rental income that was anticipated. Conversely, the structure gets constructed on time, on or under budget, into a robust leasing market and it's a home run where the worth of the 12.5% joint endeavor interest far exceeds 100% of the value of the undeveloped parcel. The taking of these threats can be significantly minimized by picking the same qualified, experience and financially strong designer partner and if the anticipated advantages are big enough, a well-prepared residential or commercial property owner would be more than justified to handle those threats.
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What's an Owner to Do?
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My very first piece of guidance to anybody thinking about the redevelopment of their residential or commercial property is to surround themselves with knowledgeable professionals. Brokers who comprehend development, accountants and other monetary advisors, development experts who will work on behalf of an owner and naturally, great [skilled legal](http://maisonmali.com) counsel. My second piece of guidance is to use those experts to determine the economic, market and legal characteristics of the possible transaction. The dollars and the offer capacity will drive the choice to establish or not, and the . My third piece of guidance to my customers is to be true to themselves and try to come to a truthful realization about the level of danger they will want to take, their capability to discover the right designer partner and after that trust that developer to manage this procedure for both celebration's mutual financial 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 expense of land and the expense of construction products are so expensive. The magic is that these development ground leases, and joint ventures supply a more economical method for a developer to control and redevelop a piece of residential or commercial property. Less costly in that the ground lease a developer pays the owner, or the revenue the designer shares with a joint venture partner is either less, less dangerous or both, than if the designer had bought the land outright, [which's](https://landproperty.danvast.com) an advantage. These are advanced deals that demand sophisticated [specialists dealing](https://vintara.co.uk) 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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