Hello,

I am currently considering a development in a City, where I currently have the following opportunity.

Tee City where the development is being considered is wanting to develop some property they own, but they do not want to sell it. They instead prefer to do a land lease with the developer. I have assumed a 30 year lease with a one time 'land lease payout' to the City to avoid recurring lease payments. The City is acceptable to this payment arrangement. The market is prime for 'for-sale' condo units and will sell at a high premium there.

My question is this: How would for-sale housing units on land leased from the City effect the ownership of the units? Property Taxes for the units?

Are there financing considerations with the mortgages of those units (someone mentioned to me that there would actually be a decrease in the value of the units over time becuase of the arrangement)?

After the Ground Lease expires, say 30 years, who owns the units? The individual condo unit owners, technically the City?

If anyone has come across this and can offer advice it would be appreciated.

Thanks!

My exposure to financing deals involving ground leases is limited. Normally, the land under a condo building would be held in the name of the association with the unit owners controlling it. From what you wrote, I can tell you the following impressions:

1- A 30 year lease is too short. Think about the economic life of a building, which is at the very least around 40 years. I think the ground lease deals that I have seen {never underwrote one} were for 100 years.

2- The units can be owned, but essentially the whole building reverts to the city at the end. Thirty years might make it impossible to get financing.

3- Property taxes will be there, but just for the building not the land.

4- The decrease in value will be there and it would be substantial unless there is an option to renew built into the lease. My guess would be that the association needs to take that future payment into consideration.

5- The lender would like the whole lease to be prepaid. Just one less thing to track, and should not be a big deal because those arrangements are usually front loaded.

6- There are a lot of technicalities involved in a deal like this, such as the city probably wanting a way to get the property and how comfortable the unit owners would feel with such restriction hanging over their heads.

Very, very complex.

Did I mention that I have never underwritten a construction deal involving a ground lease? I have seen the deals, but never sat down and thought about the risks.

Thanks for your insight..

Can you elaborate on the point you made here-

4- The decrease in value will be there and it would be substantial unless there is an option to renew built into the lease

As well, do you know of a source where I can get examples of these types of ground leases/Development Agreements online? I imagine someone must have them posted somewhere.

Side question--Do you know what cost (percentage) should be allocated to Title Insurance and Performance Bond in a proforma? (I am relating them to the Total Hard Cost of the building)

Thanks!

Can you elaborate on the point you made here- You mentioned a thirty year lease. If you construct an improvement, the value decreases as time elapses because you can not use the building for all of its economic life.

- do you know of a source where I can get examples of these types of ground leases/Development Agreements online? Nope. I would try google

- Do you know what cost (percentage) should be allocated to Title Insurance and Performance Bond in a proforma? The title insurance is going to be the same for anyone so ask a title agency, the performance bond can get tricky depending on contractor. This is just a guess since I know next to nothing on bond pricing

Will:
I'm working on the same issue and would like it if you could keep me posted on replies you get.
One thing's for sure: 30 years are not long enough; you'll need a minimum of 50 to attract lenders for you and your unit buyers.
Check your state's condominium act.
Conwayland