Simple Fee Ground Lease Purchase
I have had couple of opportunities to purchase a simple fee land lease where I will be purchasing the land only, and the commercial building on top is paying me a simple fee each month. At the end of the lease, the building will be mine as well.
Has anyone personally been though this? did you enjoy the experience? what kind of return do you expect?
@Wala Habiby
We own multiple strip centers or malls where we are on a ground lease. We are always trying to buy the ground from the owners, for the most part we have not been successful.
I would be very interested in finding opportunities to buy the ground like you are describing depending how much time is left on the lease, the closer you get to that time, the more desperate the owner of the building will be to buy the ground off of you to not lose the building.
The ground lease always spells out how much rent is paid. Ultimately what you can get at a later date when you want to sell the ground will depend on the viability of the use of the building at that time. If it’s a retail shopping center in an area where land is easy to come buy and retail continues to go downhill, it may be worth less than you paid
I was wondering what kind of a CAP should I expect on this type of investment. The options I saw had shopping centers on top of them in good areas. Zero expense for the land owner, just collect rent every month.
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Originally posted by @Wala Habiby:I was wondering what kind of a CAP should I expect on this type of investment. The options I saw had shopping centers on top of them in good areas. Zero expense for the land owner, just collect rent every month.
CAP rates will vary depending on the market, the asset and credit rating of the tenant. The only real expense you will have are taxes and insurance. Generally the tenant takes care of everything else but this all depends on the lease. You need to review the lease thoroughly.
@Greg Dickerson this is a land lease where I would be the land owner. The shopping center's owner is collecting rent and paying insurance and taxes. I would be paying zero expenses.
Assuming this is a retail tenant, I would check with some NNN brokers as they would most likely deal with ground lease sales. I'm not 100% who, but they're a few retail operators who are known to sign ground leases. As @Ariel Jeidel stated, the value can decrease depending on the area and demand for retail space in that area.
In regards to cap rates, CoStar has some info, however a NNN broker would be more valuable in that area.
Good Luck,
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We typically see ground leases in areas with fairly high land costs. Whats the term left on the lease? Its often going to exceed to usable life of the building so I don't factor that as a value add....
@Ronald Rohde In this case its about 5 years with options to extend for 30 years
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Originally posted by @Wala Habiby:@Ronald Rohde In this case its about 5 years with options to extend for 30 years
Ok so one scenario allows you to get a decently aged building. The other scenario gets 30 years of income stream at a fixed rate. What are your predictions on interest rates in 30 years? Are the escalations 3-5% per annum?
@Ronald Rohde Its 3% but every 5 years!
I love dirt. Inflation loves dirt. Time loves dirt. Only thing better than dirt, is dirt that pays anything over 5% without lifting a finger.
Only condition, leverage hates dirt, so don't mortgage dirt.
@Wala Habiby I know I’m 3 years late on this thread but I was curious whether you went through with purchasing the property. If you did, can you provide some details about your experience? Have you come across any similar deals?
@Austin R. no the deal didn't make sense and I haven't seen another one since. I feel like if you already owned the land and leased your land for 20+ years it should have great income but on the one I saw, the return was really low (Yes it was zero risk or at least very close to it, but still didn't make sense)
@Wala Habiby Oh I see. That makes sense. Thanks for the quick reply on an old post.
@Austin R. Happy to help.