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Whether you are a debtor or a loan provider, if you are considering 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 fee interest in the land or (b) provisions to protect the lending institution (as leasehold mortgagee) from certain risks that could develop as a result of the debtor having a leasehold interest in the land instead of charge ownership. The so-called "subordinated charge" described in stipulation (a), above, is less common and essentially permits a cost mortgage. According, the top ten factors to consider listed below concentrate on defenses needed in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.

1. Avoid a Sublease.

The lending institution will prefer (or might require) that the ground lease not be a sublease. A sublease would need extra evaluation associated with the prime lease and can develop extra complexities. The lending institution may enforce requirements for extra security and/or protections and assurances if the ground lease is a sublease.

2. Fixed Rent.

The lender will wish to be able to measure its threat if it should deal with taking back the residential or commercial property in foreclosure. Should it enter the shoes of the borrower as lessee under the ground lease, it will want to understand that the lease is repaired or at least foreseeable, preferably with limited or no escalations.

3. Long Term.

Leasehold lending institutions prefer that the term of the ground lease be considerably longer than the regard to the loan because the loan provider will desire a sufficiently extended period of time after foreclosure to try to recuperate its investment from the residential or commercial property. Accordingly, ground leases with a fairly brief staying term can be troublesome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with product 3 above, the lending institution will want the right to exercise renewal choices to be sure that the term will be sufficiently long. The lending institution will likewise want the right to work out any renewal choices even if the borrower/ground lessee is in default or has actually failed to work out the renewal options. The very same uses to any purchase alternatives, which the lender will also desire the right to work out in case it identifies that its finest strategy is to purchase out the fee owner's/ ground lessor's interest in the land.

5. Broad Use Clause.

The lender will want broad rights to use the residential or commercial property, without unnecessary constraints. After foreclosure, the lender might need to change making use of the residential or to assist in the sale, lease or other personality of the residential or commercial property or to enhance profits. The loan provider will not wish to have to look for approval of the ground lessor for a change in use.

6. No Merger Clause.

The ground lease ought to 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 fee interest in the residential or commercial property. A merger concern could emerge, for instance, if the ground lessee exercises a choice to acquire that may have been granted under the ground lease. The "no merger" provision is planned to prevent such a merger from wiping out 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 cost estate merge.

7. Limited Liability of Lender.

From the loan provider's viewpoint, the ground lease ought to provide that, in case of foreclosure, the leasehold lending institution 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 should contain couple of, if any, "individual" covenants, that is, provisions that are personal to, or can just be performed by, the borrower/ground lessee. Such covenants, if breached, generally are not capable of treatment by the leasehold lender before or after foreclosure and could result in a non-curable default and the threat of termination of the ground lease.

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

The ground lease ought to include an express right for the ground lessee to participate in a leasehold mortgage, vowing 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 proprietor's lien that might otherwise be offered to the ground lessor under applicable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold loan provider will require that the leasehold mortgage manages the usage of profits of casualty and condemnation, instead of any contrary provision in the ground lease. The loan provider has an interest in the usage of such proceeds and whether they are utilized for repair or rebuilding or are used to the loan balance, and the loan provider will want such earnings applied as supplied in the mortgage. With respect to condemnation, the ground lessor does have a recurring interest in the land so the ground lease might provide that an award for a temporary 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 might be applied to rebuilding or remediation, and for an overall taking, the award may be used initially to payment of the loan and after that equitably distributed to the ground lessee and ground lessor.

Conclusion

The foregoing is a brief introduction of how particular standard regards to a ground lease are viewed from the lender's viewpoint for a financeable ground lease. The ground lessee would be well served by negotiating for these provisions in advance and not waiting for a leasehold loan provider to raise these points at the time of loan negotiation. There are other important features of a financeable ground lease, such as treatment rights, waivers of specific defaults and no termination of the ground lease pending foreclosure to name a few, that are important too. These provisions might be the topic of future posts.