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 charge interest in the land or (b) provisions to protect the lending institution (as leasehold mortgagee) from particular dangers that could develop as an outcome of the debtor having a leasehold interest in the land rather of cost ownership. The so-called "subordinated fee" referred to in stipulation (a), above, is less typical and essentially permits a fee mortgage. According, the top 10 considerations listed below concentrate on defenses 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 related to the prime lease and can produce extra complexities. The lender might impose requirements for additional security and/or securities and assurances if the ground lease is a sublease.

2. Fixed Rent.

The lender will desire to have the ability to measure its threat if it should deal with reclaiming the residential or commercial property in foreclosure. Should it enter the shoes of the borrower as lessee under the ground lease, it will wish to know that the lease is fixed or at least predictable, ideally with restricted or no escalations.

3. Long Term.

Leasehold loan providers prefer that the term of the ground lease be significantly longer than the regard to the loan due to the fact that the lending institution will desire a sufficiently long duration of time after foreclosure to try to recover its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly short staying 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 exercise renewal options to be sure that the term will be sufficiently long. The loan provider will likewise want the right to work out any renewal options even if the borrower/ground lessee remains in default or has stopped working to work out the renewal choices. The exact same applies to any purchase alternatives, which the loan provider will likewise desire the right to work out in case it identifies that its best strategy is to buy out the fee owner's/ ground lessor's interest in the land.

5. Broad Use Clause.

The loan provider will want broad rights to use the residential or commercial property, without excessive restrictions. After foreclosure, the lending institution may require to alter using the residential or commercial property to help with the sale, lease or other personality of the residential or commercial property or to enhance income. The lender will not wish to have to seek permission of the ground lessor for a change in usage.

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 acquires the ground lessor's fee interest in the residential or commercial property. A merger problem might arise, for instance, if the ground lessee exercises a choice 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 might 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 lender's point of view, the ground lease need to supply that, in the occasion 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 task of its interest in the residential or commercial property.

8. Few Personal Covenants.

The ground lease need to consist of few, if any, "personal" covenants, that is, arrangements that are individual to, or can just 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 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 should consist of a reveal right for the ground lessee to enter into a leasehold mortgage, pledging as security its ground lease interest in the land along with its interest in the enhancements. The loan provider will likewise desire to see a waiver of any property owner's lien that might otherwise be available to the ground lessor under relevant law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lending institution will require that the leasehold mortgage controls making use of profits of casualty and condemnation, instead of any contrary provision in the ground lease. The loan provider has an interest in making use of such proceeds and whether they are utilized for restoration or restoring or are applied to the loan balance, and the lender will desire such profits used as supplied in the mortgage. With respect to condemnation, the ground lessor does have a recurring interest in the land so the ground lease may offer that an award for a temporary taking is payable to the ground lessee for the short-term loss of usage of the residential or commercial property. For a partial taking, the award may be used to reconstructing or remediation, and for an overall taking, the award might be applied initially to payment of the loan and after that equitably distributed to the ground lessee and ground lessor.

Conclusion

The foregoing is a short overview of how specific basic 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 negotiating for these provisions in advance and not waiting on a leasehold lender to raise these points at the time of loan settlement. There are other essential 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 vital as well. These provisions might be the subject of future short articles.