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Whether you are a customer 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 includes either (a) "subordination" of the landlord's fee interest in the land or (b) arrangements to secure the loan provider (as leasehold mortgagee) from specific dangers that could develop as a result of the customer having a leasehold interest in the land instead of cost ownership. The so-called "subordinated cost" referred to in provision (a), above, is less typical and basically permits a cost mortgage. According, the leading ten factors to consider below focus on defenses needed in a ground lease in order for a leasehold mortgagee to think about the ground lease financeable.
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1. Avoid a Sublease.

The lending institution will prefer (or might require) that the ground lease not be a sublease. A sublease would require extra evaluation related to the prime lease and can produce additional intricacies. The lender might enforce requirements for additional security and/or defenses and guarantees if the ground lease is a sublease.

2. Fixed Rent.

The loan provider will want to be able to measure its risk if it must face reclaiming the residential or commercial property in foreclosure. Should it step into the shoes of the borrower 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 lending institutions prefer that the regard to the ground lease be substantially longer than the term of the loan due to the fact that the loan provider will want a sufficiently long duration of time after foreclosure to attempt to recuperate its investment from the residential or commercial property. Accordingly, ground leases with a relatively brief staying term can be bothersome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with item 3 above, the lender will want the right to work out renewal alternatives 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 stopped working to exercise the renewal choices. The same uses to any purchase alternatives, which the loan provider will also want the right to work out in case it figures out that its finest course of action is to buy out the charge owner's/ ground lessor's interest in the land.

5. Broad Use Clause.

The lending institution will desire broad rights to use the residential or commercial property, without unnecessary restrictions. After foreclosure, the lender might require to change making use of the residential or commercial property to help with the sale, lease or other personality of the residential or commercial property or to boost earnings. The loan provider will not wish to need to seek approval of the ground lessor for a change in usage.

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 "merge" if the ground lessee obtains the ground lessor's fee interest in the residential or commercial property. A merger concern might emerge, for example, if the ground lessee exercises an alternative to buy that might have been granted under the ground lease. The "no merger" provision is intended to prevent such a merger from wiping out the lender'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 viewpoint, the ground lease should provide that, in the occasion of foreclosure, the leasehold lending institution will just have liability throughout its duration of ownership and will not have continuing liability after its sale and/or task of its interest in the residential or .

8. Few Personal Covenants.

The ground lease need to contain few, if any, "personal" covenants, that is, arrangements that are individual to, or can only be performed by, the borrower/ground lessee. Such covenants, if breached, normally are not capable of remedy by the leasehold loan provider before or after foreclosure and might lead to a non-curable default and the danger 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 enter into a leasehold mortgage, vowing as security its ground lease interest in the land in addition to its interest in the improvements. The loan provider will also wish to see a waiver of any property owner's lien that may otherwise be readily available to the ground lessor under applicable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lender will need that the leasehold mortgage manages the usage of earnings of casualty and condemnation, as opposed to any contrary provision in the ground lease. The lender has an interest in making use of such proceeds and whether they are utilized for remediation or restoring or are used 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 residual 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 temporary loss of usage of the residential or commercial property. For a partial taking, the award may be used to reconstructing or restoration, and for a total 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 quick overview of how certain basic terms of a ground lease are viewed from the lender's point of view for a financeable ground lease. The ground lessee would be well served by negotiating for these arrangements in advance and not waiting for a leasehold lender to raise these points at the time of loan settlement. There are other essential functions of a financeable ground lease, such as treatment rights, waivers of specific defaults and no termination of the ground lease pending foreclosure among others, that are vital also. These arrangements might be the subject of future short articles.