Whether you are a borrower or a lending institution, 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 property owner's cost interest in the land or (b) provisions to secure the loan provider (as leasehold mortgagee) from certain dangers that could emerge as a result of the debtor having a leasehold interest in the land rather of cost ownership. The so-called "subordinated charge" referred to in stipulation (a), above, is less typical and essentially enables a charge mortgage. According, the top ten considerations listed below concentrate on protections 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 choose (or might need) that the ground lease not be a sublease. A sublease would need extra review connected with the prime lease and can produce extra intricacies. The loan provider may enforce requirements for extra security and/or defenses and guarantees if the ground lease is a sublease.

2. Fixed Rent.

The lender will desire to be able to measure its threat if it ought to face taking back the residential or commercial property in foreclosure. Should it enter the shoes of the debtor as lessee under the ground lease, it will need to know that the lease is fixed or a minimum of predictable, preferably with limited or no escalations.

3. Long Term.

Leasehold loan providers choose that the regard to the ground lease be significantly longer than the regard to the loan because the loan provider will desire a sufficiently extended period of time after foreclosure to attempt to recuperate its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly brief remaining term can be problematic.

4. Right to Exercise Renewal and Purchase Options.

Consistent with product 3 above, the loan provider will want the right to exercise renewal options to be sure that the term will be sufficiently long. The lender will likewise desire the right to work out any renewal choices even if the borrower/ground lessee remains in default or has stopped working to work out the renewal options. The exact same applies to any purchase options, which the loan provider will also desire the right to exercise in case it determines that its finest 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 excessive constraints. After foreclosure, the lending institution may require to alter using the residential or commercial property to assist in the sale, lease or other personality of the residential or commercial property or to improve revenue. The lender will not want to have to seek approval of the ground lessor for a modification in use.

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 "combine" if the ground lessee acquires the ground lessor's cost interest in the residential or commercial property. A merger concern could emerge, for instance, if the ground lessee exercises a choice to acquire that might have been given under the ground lease. The "no merger" stipulation is intended to prevent such a merger from eliminating the lender's leasehold mortgage that could happen by operation of law if the leasehold interest upon which the mortgage is based vanishes if the leasehold estate and cost estate combine.

7. Limited Liability of Lender.

From the lender's perspective, the ground lease must offer that, in the occasion of foreclosure, the leasehold loan provider will just have liability during 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 need to contain couple of, if any, "personal" covenants, that is, provisions that are individual to, or can only be carried out by, the borrower/ground lessee. Such covenants, if breached, generally are not capable of treatment by the leasehold lender 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 must include a reveal right for the ground lessee to participate in a leasehold mortgage, promising as security its ground lease interest in the land along with its interest in the enhancements. The lender will also wish to see a waiver of any property owner's lien that might otherwise be available to the ground lessor under appropriate law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lending institution will need that the leasehold mortgage controls using profits of casualty and condemnation, as opposed to any contrary arrangement in the ground lease. The lender has an interest in making use of such earnings and whether they are utilized for restoration or restoring or are applied to the loan balance, and the lender will want such proceeds applied as provided in the mortgage. With respect to condemnation, the ground lessor does have a residual interest in the land so the ground lease may 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 may be applied to restoring or restoration, and for an overall taking, the award may be applied first to payment of the loan and then equitably dispersed to the ground lessee and ground lessor.

Conclusion

The foregoing is a short overview of how specific standard terms of a ground lease are seen from the loan provider's viewpoint for a financeable ground lease. The ground lessee would be well served by working out for these arrangements upfront and not awaiting a leasehold lender to raise these points at the time of loan settlement. There are other crucial features of a financeable ground lease, such as remedy rights, waivers of specific defaults and no termination of the ground lease pending foreclosure among others, that are vital too. These arrangements might be the topic of future posts.