I own 2.5 acres that I want to Ground Lease (NNN) To A Convenience Store Chain.
I’m new to commercial real estate transactions and ground leases. Originally I wanted to sell my property by-owner, but after learning about ground leases it sounds more desirable. I reached out to the real estate department of several convenience store chains and two got in touch within a couple days of my inquiry. One of those interested parties, a preferred developer for the chain, is working on an LOI to purchase the property. We haven’t discussed a purchase price at all, but they did a site map and it worked out fine. I loosely mentioned I might prefer to do a ground lease and they weren’t too receptive to the idea. 

I’m to the point where I realize this transaction and up coming negotiations are beyond my comfort level and experience. I’ve reached out to three commercial brokers to interview them to market my property. I’m still waiting on return phone calls. 

Is it possible to do a ground lease without having to develop the property at all myself? I like the idea of getting a passive rent check over a lump sum on a sale, but I also have no idea how that rent is going to be determined. I’m also guessing my broker will get a percentage (most likely 4%) of the total lease amount. Any help would be appreciated. 

The property is 2.5 acres, located at an intersection with over 35k vehicles per day and it’s less than 1/4 of a mile from an I-81 interchange, it’s the first accessible property, that has 60k vehicles per day. Median income is $65k for the area. Based on my research I think the property is worth close to 2 million.
[{"id": "i9z96ul", "text": "Sure it\u2019s possible, but you probably need a good commercial real estate attorney to negotiate and draw up the ground lease. Attorneys can act as real estate brokers on their own. If an attorney will work with you directly, I\u2019m not sure you need to get a broker involved. Each one is likely to tell you something slightly different and that will be confusing as someone unfamiliar with CRE. call your state\u2019s bar association for a referral. If they aren\u2019t interested, they\u2019ll at least be able to point you to a capable broker.", "replies": [{"id": "i9zcpzq", "text": "I would rather pay an attorney an hourly rate than a commercial broker when I've already had interest from 2 of the 5 companies that fall under this properties highest and best use, which was confirmed from a commercial real estate appraiser. I need an attorney to go over the broker agreements because I don't completely understand the fee structure specially with a lease.\n\nThe first commercial broker I talked to said marketing was about 20% of the work and value in going with a broker and negotiations the terms was the other 80%. I honestly don't have enough experience to know if I'm getting screwed or not (on either end by the potential buyer/lessor or a broker), and I don't know if a broker would just end up paying for themselves by getting me a higher rent rate or sale price. I just have a hard time trusting commercial realtors because their cost of service seems rather larger compared to the value in my scenario of having a lot with unrestricted zoning where I know my target customer.\n\nThere's about 20-30 ground leases/NNN available from these two companies on the market or recently sold where I can pull the data and get an estimate on the properties value based on the location, traffic volume and demographics once a site has been built. I believe with a store on the lot the value is around $4-5 million. I don't think a $170k NOI or higher is out of the question given the comps on the market, but again, I simply don't know for sure.", "replies": [{"id": "ia1sik8", "text": "You\u2019re gonna get fucked by said convenience store because you cheaped out on not using a commercial broker. \n\nGround leases are complex transactions. Find a good local broker who really understands your market and can help you get not only the right price from the right buyer, but the right terms as well. We\u2019ll worth the peace of mind.", "replies": [{"id": "ia1x7xa", "text": "&gt;I\u2019m to the point where I realize this transaction and up coming negotiations are beyond my comfort level and experience. I\u2019ve reached out to three commercial brokers to interview them to market my property. I\u2019m still waiting on return phone calls.\n\nMaybe you missed this bit, but thank you for your input.", "replies": [{"id": "ia27dfb", "text": "I saw that and think that\u2019s the right way to go. Just reiterating that these kinds of things are definitely better to have professional support. That bad deal could cost you a ton of money if bad terms harm the property value in the eyes of an investor.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ia1pg9q", "text": "Attorneys kill deals. Do not rely on one for this. Only allow your attorney to give you direction when it comes down to the law, and that\u2019s it.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i9zegwf", "text": "In general, I don't recommend that individuals go the ground rent option. Those are really best utilized by companies. Ground leases are usually extremely long-term with low payout rates. \n\nConsider your age. It is likely that you will die before a ground lease runs out. Is this an investment more for your children and grandchildren?", "replies": [{"id": "i9zfg9k", "text": "Could you clarify what you mean by low pay out?  I\u2019m 33 years old so statistically speaking I shouldn\u2019t die soon hahaha.", "replies": [{"id": "i9zgiqh", "text": "They aren't going to build on top of your ground lease if you only offer a 20 year term. Because after that, you get the building. I'd say 40 to 50 years is about the min. For a ground lease. So best case you will be 77", "replies": [{"id": "i9zij7f", "text": "I would be fine with that length of term. If I die everything will go to my niece and she won\u2019t have to worry about managing anything. Slow and steady is more of my speed with this investment.", "replies": [{"id": "i9zlabm", "text": "Also, envirnmemtal indemnity will be important", "replies": [{"id": "i9zlngv", "text": "Could you explain that further? I\u2019ve never heard of that term before.", "replies": [{"id": "i9zo8tx", "text": "It's your land and they are going to operate a gas station. If they do something, ie don't maintain tanks etc. They are responsible for the environmental damage and remediation (which can be super expensive.) The indemnity is what puts the burden on the tenant.\n\nKeep in mind we dont know what environmental regs will look like in 50+ years. There could be laws limiting redevelopment of former gas station sites due to yet to be discovered harm to people.", "replies": [{"id": "i9zz5mt", "text": "Thank you", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "ia0bx0a", "text": "You could structure the lease with a reversion or buy-out option after a certain number of years to make it more attractive to the tenant.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i9zh6s2", "text": "I meant a low relative to what you would receive in a fee simple sale. \n\nI can't tell you what your property's market ground rent would be specifically.\n\nGround leases are usually 50-99 years long. The party who builds the improvement will want to be able to use their building throughout it's economic life which is usually about 50 or 60 years for a commercial building.", "replies": [{"id": "i9zi31i", "text": "I would be fine with that as long as it\u2019s $170k or more annually with 8-10% increases every 5 years. I don\u2019t need a lump sum of money and I believe I read some banks will do some LTV of the property so if I needed to borrow for other investments that could be an option. The only down side I see to a lease is having to pay income tax rather than if I had a payout and bought other real estate properties depreciation would cover my cash flow so there is a tax incentive but it\u2019s also more work to build a portfolio. My overall goal is just to use this income to acquire more real estate over the next 30 years.", "replies": [{"id": "i9zmchh", "text": "$170K is unrealistically high. You're probably going to be closer to $20,000 than $170,000. But again, I don't know enough about your property.", "replies": [{"id": "i9zt68z", "text": "$170k is actually on par with the average for this type of property from these companies.", "replies": [{"id": "i9zva2r", "text": "I just don\u2019t see how it would be possible to get someone to give you $170,000 per year for 50+ years on an unimproved piece of land that you think is worth $2M total.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i9zj0m4", "text": "Where along I-81 are you? I have a gas and c-store that might have interest.", "replies": [{"id": "i9zloft", "text": "I sent you a chat message.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i9zpk65", "text": "A lot of these people have no idea what they\u2019re talking about. I do this for a living. Feel free to shoot me a DM. Happy to help!", "replies": [], "depth": 1}, {"id": "ia0574p", "text": "Why don\u2019t you post the address? If you own it, no one is going to steal it. \n\nI\u2019m curious why you think a (4%) return is better than lumpsum?", "replies": [{"id": "ia05j8d", "text": "I enjoy my privacy. The cash on cash return would be over 100%. I'd rather have steady cash flow without having to do anything and just slowly use that money to invest in other real estate.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ia0hv0l", "text": "You can\u2019t do a ground lease and not develop the property. The preferred developer the potential tenant put you in contact with only makes money by acquiring the property, negotiating a lease, and developing the property. Then they either sell it, or refinance their construction loan and retain it. You might be able to work out some sort of JV deal with them, but that\u2019s not common.", "replies": [{"id": "ia2r7fl", "text": "Plenty of retailers will ground lease and self develop, obtaining their own approvals and all.\n\nIts not as common as tenants who want a build to suit though.", "replies": [{"id": "ia37nbl", "text": "No they don\u2019t. Virtually all retailers use third-party \u201cpreferred\u201d developers. \n\nI don\u2019t know of one tenant in the STNL space that does their own development, and I do BTS construction lending for a living. Last year I closed BTS construction loans for 7-Eleven, Wawa, Starbucks, Dollar General, CVS, O\u2019Reilly\u2019s, Dutch Bros, Chick-fil-a, DaVita, Tesla, Whataburger, and several non-credit tenants. \n\nThey all follow the same process. The third-party developer gets the land under contract, negotiates the lease, takes out their own construction loan, and the vast majority of the time they sell the property at completion. \n\nOverall, it doesn\u2019t matter if they structure it as a ground lease or not. The difference between the exit sales price and construction cost is how the developer makes their money. Hence the developer OP is talking to wasn\u2019t receptive to OP retaining the property as the lessor.", "replies": [{"id": "ia5ecpn", "text": "I've completed many ground leases with zero land owner responsiblities prior to delivery aside from it being environmentally clean. Some tenants were truly self developing including approvals and some used a preferred developer who they paid a fee like a contractor, but still directly ground leased from us as property owner.\n\nThe answer to OP's questions is that you absolutely can  ground lease your property to a NNN tenant in As Is condition with them doing everything. This will reduce number of potential tenants, but it can be done when a tenant will do those deals and wants the property enough.", "replies": [{"id": "ia5gc81", "text": "Can you name any national tenants, especially in the c-store space, that are doing their own developments? I\u2019ll wait\u2026 \n\nI know OP \u201ccan\u201d, but that\u2019s not a realistic expectation based on what OP is looking for.", "replies": [{"id": "ia5gxh6", "text": "Royal Farms. Did one in 2019.\n\nEdit: based on your site being off I-81, they might be the ideal tenant u/Scrace89. The $170k rent you're looking for is probably too high in a market that still has an undeveloped hard corner that close to a highway, but hey, you gotta ask something.", "replies": [{"id": "ia5nrq1", "text": "\u201cThe rent you\u2019re looking for is probably too high\u201d = \u201cnot realistic\u201d \n\nAlso not a national tenant, granted they trade for &lt; 6% caps.", "replies": [], "depth": 7}, {"id": "ia6c946", "text": "I did reach out to them and it\u2019s been crickets. The other two c-stores that respond are much larger. Thanks for your response. :)", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ia0j1q7", "text": "The problem/risk is that typically with these kind of ground leases, the entitlements are on the lessor (LL).  If you don't have experience taking projects through the entitlement and site plan approval process, it is going to be difficult to convince a creditworthy gas/c store operator to lease to you.  That is why they have referred it to third party \"preferred developers\" who they know can get it done.  For background, I have represented and worked in house for a preferred developer for multiple national and regional cstore/gas operators in the NE and Mid-Atlantic and negotiated and drafted all sorts of NNN, absolute net and ground leases  They will want to purchase the property, since based on the figures you are giving the can build to a mid 8 cap, and then sell for somewhere in the 4-5.5 cap range, depending on the creditworthiness of the tenant and whether or not they can bond off the lease (which is admittedly, much less common than it used to be--you need AAA rated credit or higher to do that but can capture a higher spread).  But if you do want to take it on yourself, more power to you.  Find a great local land use attorney to lead you through the entitlement process.  You can probably higher a local developer with experience for a consulting fee as well.  Just don't have the land use attorney negotiate the lease--commercial leases, especially with national retailers, are some of the most complex docs there are in commercial real estate transactions.  I always think of it more as a marriage, since you are going to have this document govern your relationship for essentially the rest of your life.  Ground leases have an added layer of complexity since, if the tenant knows their stuff, they will be looking at title and environmental more closely than a standard NNN lease.  However, there are good margins in ground leases, even if you don't sell once you get the tenant to RCD.  Just be prepared to take on entitlement risk and possibly some work, e.g., on most of our c store leases we clear and grade the site and deliver a compacted pad with utilities brought to the end of the building envelope.  This requires permits and approvals from multiple agencies such as local water authority, local planning and zoning, and possibly the state environmental authority.  Anyways, that are just some things to consider.  I don't agree with the recommendation that individuals not do ground leases, you just need to draft it so that it inures to your successors, which is fairly standard.  You also don't need to worry about reversion, a ground lease automatically reverts back to the fee owner upon expiration or termination.", "replies": [{"id": "ia129c8", "text": "This is the best answer. The cost to build gas station c/stores has gone up by over 55% in the last year so a lot of the operators stopped doing ground leases and prefer a BTS. \n\nThat being said Tenants ground lease all the time. You will end up with significantly more in back end value using a broker then doing it yourself. Attorney\u2019s can work through the lease, but are not right to use for negotiating business points. You\u2019re tripping over dollars to save pennys by not using a RE broker.", "replies": [], "depth": 2}], "depth": 1}]