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Whether you are a borrower or a lending institution, 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 property owner's fee interest in the land or (b) arrangements to safeguard the loan provider (as leasehold mortgagee) from specific dangers that might emerge as a result of the borrower having a leasehold interest in the land instead of cost ownership. The so-called "subordinated cost" described in provision (a), above, is less typical and essentially enables a cost mortgage. According, the top 10 considerations listed below concentrate on protections needed in a ground lease in order for a leasehold mortgagee to think about the ground lease financeable.

1. Avoid a Sublease.

The loan provider will choose (or may require) that the ground lease not be a sublease. A sublease would need extra review associated with the prime lease and can create extra complexities. The lender may impose requirements for extra security and/or defenses and guarantees if the ground lease is a sublease.

2. Fixed Rent.

The loan provider will want to have the ability to measure its danger 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 need to know that the lease is fixed or a minimum of predictable, preferably with restricted or no escalations.

3. Long Term.

Leasehold loan providers choose that the regard to the ground lease be considerably longer than the term of the loan due to the fact that the lender will desire a sufficiently long duration of time after foreclosure to try to recuperate its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly short remaining term can be bothersome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with item 3 above, the loan provider will want the right to work out renewal options to be sure that the term will be adequately long. The lending institution will likewise desire the right to work out any renewal alternatives even if the borrower/ground lessee remains in default or has failed to exercise the renewal options. The same uses to any purchase alternatives, which the lending institution will also desire the right to exercise in case it determines that its finest strategy is to purchase out the fee 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 undue restrictions. After foreclosure, the loan provider may require to alter making use of the residential or commercial property to facilitate the sale, lease or other disposition of the residential or commercial property or to boost profits. The lending institution will not want to need to seek permission of the ground lessor for a change in use.

6. No Merger Clause.

The ground lease need to consist of a "no merger" arrangement 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 cost interest in the residential or commercial property. A merger concern might arise, for example, if the ground lessee exercises an alternative to buy that may have been approved under the ground lease. The "no merger" provision is planned to prevent such a merger from eliminating the loan provider's leasehold mortgage that could take place by operation of law if the leasehold interest upon which the mortgage is based disappears if the leasehold estate and fee estate combine.

7. Limited Liability of Lender.

From the lending institution's point of view, the ground lease need to provide that, in the occasion of foreclosure, the leasehold loan provider will only have liability throughout its duration 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 ought to contain few, if any, "personal" covenants, that is, provisions that are individual to, or can just be performed by, the borrower/ground lessee. Such covenants, if breached, typically are not capable of cure by the leasehold loan provider before or after foreclosure and might result in a non-curable default and the threat of 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, vowing as security its ground lease interest in the land along with its interest in the enhancements. The lender will likewise want 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 lender will need that the leasehold mortgage manages the usage of profits of casualty and condemnation, as opposed to any contrary provision in the ground lease. The loan provider has an interest in the use of such proceeds and whether they are utilized for repair or rebuilding or are applied to the loan balance, and the lending institution will desire such earnings applied as provided in the mortgage. With regard to condemnation, the ground lessor does have a residual interest in the land so the ground lease might offer that an award for a short-lived taking is payable to the ground lessee for the momentary loss of usage of the residential or commercial property. For a partial taking, the award might be used to rebuilding or remediation, and for a total taking, the award may be applied initially to payment of the loan and then equitably dispersed to the ground lessee and ground lessor.

Conclusion

The foregoing is a quick overview of how specific standard regards to a ground lease are seen from the lending institution'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 loan provider to raise these points at the time of loan settlement. There are other essential functions of a financeable ground lease, such as remedy rights, waivers of certain defaults and no termination of the ground lease pending foreclosure among others, that are crucial as well. These arrangements may be the subject of future articles.