Need Some Ground Lease Advice

[John Cusick]

I am looking at a potential commercial ground lease for a parcel I own in LA County. The parcel is under 2 acres. I am trying to understand what's customary and market on a number of points, and so I'd appreciate some quick advice on the following issues:

1. How do I calculate the annual NNN lease value of the property? I have read that the annual NNN lease payment should be about 6-7% of the property value. Is that consistent with typical practices in LA County? Is there another method I can use to estimate the current market lease value of the property?

2. What kind of lease payment escalation clause is market? Should the lease payment adjust annually or less frequently? Should the adjustment be based on any index or be a fixed number/percentage?

3. I've read that some ground leases provide for a periodic (e.g., every 5 or 10 years) appraisal of the site and resetting of the annual lease payment based on that appraisal. Is that common? Is that a good idea from Landlord's stand point?

4. The prospective tenant would like to have a right of first refusal. I don't see any benefit for me in granting that right? Am I mistaken? If I do grant that right, should I be asking for any additional consideration for it? Any issues to watch for regarding the right of first refusal?

5. How much free time should I allow the tenant before lease payments start?

6. What kinds and limits of insurance coverages should I require the tenant to procure?

7. Is there a good ground lease form for California that I can use as a starting point for my ground lease agreement?

Many thanks!

[Greg Dickerson]

Originally posted by @John Cusick:

I am looking at a potential commercial ground lease for a parcel I own in LA County. The parcel is under 2 acres. I am trying to understand what's customary and market on a number of points, and so I'd appreciate some quick advice on the following issues:

1. How do I calculate the annual NNN lease value of the property? I have read that the annual NNN lease payment should be about 6-7% of the property value. Is that consistent with typical practices in LA County? Is there another method I can use to estimate the current market lease value of the property?

2. What kind of lease payment escalation clause is market? Should the lease payment adjust annually or less frequently? Should the adjustment be based on any index or be a fixed number/percentage?

3. I've read that some ground leases provide for a periodic (e.g., every 5 or 10 years) appraisal of the site and resetting of the annual lease payment based on that appraisal. Is that common? Is that a good idea from Landlord's stand point?

4. The prospective tenant would like to have a right of first refusal. I don't see any benefit for me in granting that right? Am I mistaken? If I do grant that right, should I be asking for any additional consideration for it? Any issues to watch for regarding the right of first refusal?

5. How much free time should I allow the tenant before lease payments start?

6. What kinds and limits of insurance coverages should I require the tenant to procure?

7. Is there a good ground lease form for California that I can use as a starting point for my ground lease agreement?

Many thanks!

The best thing to do is talk to a local Commercial Broker who reps suitable tenants for the property as everything is negotiable and every market is different and every site in every market is different. Add the current Covid situation to the mix and things really start to get interesting. Bottom line however the more desirable the location the more you can ask but again things are very different right now for typical land lease prospects so its not a great time to negotiate as the owner.