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Top ten Basic Terms for A Financeable Ground Lease

Whether you are a borrower or a lender, if you are considering a loan supported by a ground lease, you need to be sure the ground lease is “financeable.” A financeable ground lease includes either (a) “subordination” of the proprietor’s fee interest in the land or (b) arrangements to secure the lender (as leasehold mortgagee) from certain risks that might emerge as a result of the debtor having a leasehold interest in the land instead of cost ownership. The so-called “subordinated cost” described in clause (a), above, is less typical and basically allows a cost mortgage. According, the top ten considerations listed below concentrate on securities required in a ground lease in order for a leasehold mortgagee to think about the ground lease financeable.

1. Avoid a Sublease.

The lending institution will prefer (or might need) that the ground lease not be a sublease. A sublease would require additional evaluation connected with the prime lease and can develop extra intricacies. The loan provider may impose requirements for extra security and/or securities and guarantees if the ground lease is a sublease.

2. Fixed Rent.

The lending institution will want to be able to quantify its danger if it should deal with reclaiming the residential or commercial property in foreclosure. Should it step into the shoes of the customer as lessee under the ground lease, it will need to know that the rent is repaired or a minimum of foreseeable, preferably with or no escalations.

3. Long Term.

Leasehold lending institutions choose that the regard to the ground lease be substantially longer than the regard to the loan because the lender will want an adequately extended period of time after foreclosure to attempt to recuperate its financial investment from the residential or commercial property. Accordingly, ground leases with a reasonably brief remaining term can be troublesome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with product 3 above, the loan provider will want the right to work out renewal alternatives to be sure that the term will be adequately long. The lender will also want the right to work out any renewal alternatives even if the borrower/ground lessee is in default or has actually failed to work out the renewal alternatives. The same applies to any purchase options, which the loan provider will also desire the right to exercise in case it figures out that its finest strategy is to purchase out the charge owner’s/ ground lessor’s interest in the land.

5. Broad Use Clause.

The lender will desire broad rights to utilize the residential or commercial property, without unnecessary restrictions. After foreclosure, the lender may need to alter the usage of the residential or commercial property to help with the sale, lease or other personality of the residential or commercial property or to improve income. The loan provider will not wish to need to seek permission of the ground lessor for a change in usage.

6. No Merger Clause.

The ground lease should include a “no merger” arrangement that the estates and interests of the ground lessor and the ground lessee do not “merge” if the ground lessee acquires the ground lessor’s fee interest in the residential or commercial property. A merger concern might develop, for instance, if the ground lessee works out an option to acquire that may have been granted under the ground lease. The “no merger” stipulation is planned to avoid such a merger from eliminating the lending institution’s leasehold mortgage that could take place by operation of law if the leasehold interest upon which the mortgage is based vanishes if the leasehold estate and charge estate merge.

7. Limited Liability of Lender.

From the loan provider’s point of view, the ground lease must supply that, in the event of foreclosure, the leasehold lender will just have liability throughout its duration of ownership and will not have continuing liability after its sale and/or task of its interest in the residential or commercial property.

8. Few Personal Covenants.

The ground lease need to contain few, if any, “individual” covenants, that is, arrangements that are personal to, or can just be performed by, the borrower/ground lessee. Such covenants, if breached, typically are not efficient in treatment by the leasehold lending institution before or after foreclosure and might lead to a non-curable default and the danger of termination of the ground lease.

9. Right to Mortgage and Waiver of Landlord’s Lien.

The ground lease need to consist of an express right for the ground lessee to participate in a leasehold mortgage, pledging as security its ground lease interest in the land along with its interest in the improvements. The lender will also want to see a waiver of any landlord’s lien that might otherwise be readily available to the ground lessor under applicable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lender will need that the leasehold mortgage controls making use of proceeds of casualty and condemnation, as opposed to any contrary arrangement in the ground lease. The loan provider has an interest in making use of such profits and whether they are utilized for repair or restoring or are applied to the loan balance, and the loan provider will want such earnings used as provided in the mortgage. With respect to condemnation, the ground lessor does have a recurring interest in the land so the ground lease might offer that an award for a short-term taking is payable to the ground lessee for the short-lived loss of use of the residential or commercial property. For a partial taking, the award might be used to restoring or repair, and for an overall taking, the award might be used first to payment of the loan and after that equitably dispersed to the ground lessee and ground lessor.

Conclusion

The foregoing is a brief overview of how particular fundamental regards to a ground lease are seen from the lending institution’s point of view for a financeable ground lease. The ground lessee would be well served by negotiating for these arrangements upfront and not waiting for a leasehold lending institution to raise these points at the time of loan settlement. There are other important features of a financeable ground lease, such as cure rights, waivers of certain defaults and no termination of the ground lease pending foreclosure among others, that are critical as well. These provisions may be the topic of future posts.