Top 10 Basic Terms For A Financeable Ground Lease
Whether you are a customer or a loan provider, if you are thinking about a loan supported by a ground lease, you require to be sure the ground lease is "financeable." A financeable ground lease consists of either (a) "subordination" of the proprietor's charge interest in the land or (b) provisions to protect the loan provider (as leasehold mortgagee) from specific risks that might emerge as a result of the customer having a leasehold interest in the land rather of cost ownership. The so-called "subordinated fee" referred to in provision (a), above, is less common and basically allows a cost mortgage. According, the leading ten factors to consider below focus on defenses required in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.
1. Avoid a Sublease.
The loan provider will prefer (or may need) that the ground lease not be a sublease. A sublease would require additional evaluation related to the prime lease and can develop extra intricacies. The lending institution might impose requirements for extra security and/or securities and guarantees if the ground lease is a sublease.
2. Fixed Rent.
The lender will want to have the ability to measure its risk if it need to deal with taking back the residential or commercial property in foreclosure. Should it enter the shoes of the customer as lessee under the ground lease, it will wish to know that the lease is repaired or a minimum of foreseeable, preferably with minimal or no escalations.
3. Long Term.
Leasehold lenders prefer that the term of the ground lease be significantly longer than the term of the loan because the lending institution will want an adequately long period of time after foreclosure to attempt to recover its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly brief remaining term can be troublesome.
4. Right to Exercise Renewal and Purchase Options.
Consistent with product 3 above, the lending institution will desire the right to work out renewal choices to be sure that the term will be adequately long. The lending institution will likewise desire the right to exercise any renewal alternatives even if the borrower/ground lessee remains in default or has actually stopped working to exercise the renewal options. The same applies to any purchase options, which the lender will also desire the right to work out in case it identifies that its best strategy is to purchase out the cost owner's/ ground lessor's interest in the land.
5. Broad Use Clause.
The loan provider will want broad rights to utilize the residential or commercial property, without unnecessary limitations. After foreclosure, the lender may need to change using the residential or commercial property to assist in the sale, lease or other disposition of the residential or commercial property or to enhance revenue. The loan provider will not wish to need to seek consent of the ground lessor for a modification in use.
6. No Merger Clause.
The ground lease need to include a "no merger" provision that the estates and interests of the ground lessor and the ground lessee do not "combine" if the ground lessee gets the ground lessor's fee interest in the residential or commercial property. A merger concern could emerge, for example, if the ground lessee exercises an option to acquire that may have been approved under the ground lease. The "no merger" provision is planned to avoid such a merger from erasing the loan provider'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 fee estate merge.
7. Limited Liability of Lender.
From the loan provider's point of view, the ground lease should supply that, in the occasion of foreclosure, the leasehold loan provider will only have liability throughout its period of ownership and will not have continuing liability after its sale and/or assignment of its interest in the residential or commercial property.
8. Few Personal Covenants.
The ground lease must contain couple of, if any, "personal" covenants, that is, provisions that are personal to, or can only be performed by, the borrower/ground lessee. Such covenants, if breached, normally are not efficient in by the leasehold lending institution before or after foreclosure and might lead to a non-curable default and the risk of termination of the ground lease.
9. Right to Mortgage and Waiver of Landlord's Lien.
The ground lease should include a reveal right for the ground lessee to get in into a leasehold mortgage, pledging as security its ground lease interest in the land as well as its interest in the enhancements. The lending institution will also wish to see a waiver of any landlord's lien that might otherwise be available to the ground lessor under applicable law.
10. Leasehold Mortgage to Control Use of Proceeds.
The leasehold lending institution will require that the leasehold mortgage manages using earnings of casualty and condemnation, instead of any contrary arrangement in the ground lease. The loan provider has an interest in making use of such proceeds and whether they are utilized for repair or restoring or are applied to the loan balance, and the lender will want such proceeds used as supplied in the mortgage. With regard to condemnation, the ground lessor does have a recurring interest in the land so the ground lease might offer that an award for a momentary taking is payable to the ground lessee for the momentary loss of use of the residential or commercial property. For a partial taking, the award may be applied to rebuilding or remediation, and for an overall taking, the award might be used first to payment of the loan and then equitably dispersed to the ground lessee and ground lessor.
Conclusion
The foregoing is a quick summary of how certain basic regards to a ground lease are viewed from the loan provider's perspective for a financeable ground lease. The ground lessee would be well served by working out for these arrangements in advance and not awaiting a leasehold loan provider to raise these points at the time of loan settlement. There are other important functions of a financeable ground lease, such as remedy rights, waivers of certain defaults and no termination of the ground lease pending foreclosure to call a couple of, that are important too. These arrangements may be the topic of future posts.