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John Cusick
  • Orange County, CA
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Need Some Ground Lease Advice

John Cusick
  • Orange County, CA
Posted Aug 2 2020, 04:05

I am looking at a potential commercial ground lease for a parcel I own in Los Angeles 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 payment I should be getting? I have read that the annual lease payment should be about 6-7% of the property value. Is that accurate? 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 be asking for any additional consideration for it? Any issues to watch for regarding the right of first refusal?

5.  How much time should I allow the tenant to close the deal and how much 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!