Land Leases - Advise

Have been trying to research the inner workings of how a land lease works to not much avail. Figured since I couldn't find any info about them WSO that I'd start a thread to see if anyone else knows anything about them/share their experiences in setting them up.

Here's the background: Have been working with my father to strategize the sale of a ~$4M Class B-/C+ commercial building in prime location in the mountains of CO. Town wants my father to sell because they want to tear down and build a Class A Hotel/Mixed use building to enhance the appeal of the town and draw more people on vacation to stay within walking distance to downtown. Problem is the building has been cranking out cash (original price was $1.2M with shitty tenants) and my father keeps pushing rents and ultimately the price tag because he doesn't want/need to sell.

My thinking is that at some point the town is going to find some way to push my father out and take over the property for pennies on the dollar. What about keeping ownership of the land (which we believe the location is more valuable than whatever asset sits on it and could be 10x more valuable 10/20/30 yrs down the road) and structure a land lease for x amount of years and sit and wait until the area develops even more? Town is happy and gets to demolish the building and put up a fancy new coffee shop/marijuana dispensary/etc. but we'll still have control of the land.

Anyone have experience in structuring a land lease? How much to charge, how long of a lease, inner workings of what it should include? Any and all advice is much appreciated!

 

If they try to force you out, sue the city and tell them to screw off. I don't think the town can force you out to build a hotel. They can only pull this crapp when they are building a road or utilities or something vital for the town, not a hotel. You could lock this up in court for years.

Array
 
Best Response

Yes, you could tie it up in court as a last resort if they come knocking.

Another option would be to structure a 50-70 year ground lease, with options to renew. Believe the law is you can't have the full term extend beyond 99 years, including options. As far as the rent structure, I'd suggest doing flat rent in 5-10 year intervals, then resetting to either some fixed increase or some measure of fair market value. For example, X dollars in years 1-10 flat/no increases, with a x% increase in year 11, then that rate from years 11-20, and so-on. Or you could say, whatever the FMV of the land itself would be today (without a building on it/undeveloped) multiplied by a certain percentage (5-7% usually from what I've seen recently), fixed for x years, then resetting by a similar methodology thereafter. If you do it this way, make sure you include a clause about the minimum rent in the event that the market tanks and the land values plummet. I.e., something like "the GREATER of 6% x FMV OR 105% of the immediately preceding rent". Also make sure you make it absolute net (in other words, the people who operate/own the building are paying for everything like utilities, property taxes, insurance, etc.). I'm not as familiar with Denver, but generally you have to be careful of pricing the rent so that it is lucrative/a good enough return for you but also not so onerous to the building owner/operator that it would make more sense for them to just buy another parcel themselves. If you want specifics on different ways you can structure it, PM me and I'm happy to give some context on things I've seen and done.

"Who am I? I'm the guy that does his job. You must be the other guy."
 

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