Most of the jobs include tax-exempt lessor structures. Since government entities and not-for-profit organizations are exempt from real residential or commercial property taxes in most jurisdictions, a ground lease in between such entities and a borrower-sponsor supplies a task the opportunity to either be exempt from residential or commercial property taxes or subject to a payment-in-lieu of taxes plan, both of which can provide substantial savings over the life of a task.
In greater education, universities normally make use of channel financed ground lease structures to build trainee housing projects. These tasks consist of a ground lease between a university, as property manager, and the borrower-sponsor, as tenant. The university accepts the ground lease because, considering that the borrower-sponsor is responsible for repayment of the bonds and the mortgage is on the leasehold, the university can build a job on campus without sustaining debt and keep the task free of charge once the ground lease is ended. During the regard to the ground lease, the arrangements of the ground lease provides a means for the university to regulate or monitor the task and receive a yearly ground lease rent.
In other markets, the company frequently owns the land and ground rents the land on which the project is to be built to the borrower-sponsor, who constructs the project and subleases it back to the company. Such a job receives a real residential or commercial property tax exemption because it is owned by a federal government entity, and because the federal government entity is also occupant under the sublease, the project receives sales tax exemptions on products throughout building and construction. The company, as tenant under the sublease, is responsible for payment of the bonds, while the borrower-sponsor develops and runs the project pursuant to terms of arrangements with the provider. The borrower-sponsor typically has an opportunity to buy the land and project when the bonds are paid.
These structures present special dangers to bond purchasers. The bonds are normally secured by mortgages on the leasehold and/or subleasehold estates. Bondholders should bear in mind the rights of celebrations to terminate the ground lease or hinder their capability to work out remedies. If the ground lease is ended or the trustee can not seize the job, the matching lien on the physical job is extinguished and the collateral plan has no value.
With that in mind, bondholders need to seek the following protections in any ground lease that becomes part of a municipal bond funding:
Term - the term of the ground lease must be at least 5 years beyond the maturity date of the bonds, and shareholders need to promote more if at all possible. The extra 5 or more years permits a workout and extension of the term of the bonds in case it is required to enable the task to cash flow to cover operating costs and debt service. If the bonds on a job have a bullet maturity, the term of the ground lease should be at least double the term of the bonds to enable a refunding of the developing bonds.
Authorization - the ground lease must explicitly authorize the borrower-sponsor to sustain a mortgage on the ground lease otherwise a court would consider the lien on the leasehold estate invalid.
Transfer and Assignment - the ground lease need to be assignable by the trustee without constraints. Failure to consist of such arrangements could avoid a mortgagee from offering or moving the leasehold estate (by sale or otherwise) upon foreclosure or the execution of an assignment-in-lieu of foreclosure. It is essential for the arrangements to permit for the trustee to designate another entity to take position in lieu of the trustee considering that the funding structure might rely on the status of borrower-sponsor to protect the tax-exempt status of the bonds and/or supply other tax benefits. Additionally, such designee ought to be entitled to a brand-new lease to aid in the restructuring of the job upon foreclosure or assignment-in-lieu of foreclosure.
Notice and Opportunity to Cure - any notice of default by the renter under the ground lease need to be offered to the trustee, and the trustee ought to have an opportunity to cure of a minimum of one month. An uncured occasion of default of occupant under the ground lease generally grants the lessor the right to end the ground lease, which would remove the trustee's security. A notice and opportunity to cure allows the trustee to preserve its collateral and later on seek compensation for such costs of debtor under the leasehold mortgage, trust indenture or other bond files.
New Lease - if the ground lease is ended for any factor, like termination upon default, or is turned down in bankruptcy, the trustee must have the chance to get in into a brand-new lease on the same terms.
No Modification - the ground lease must not be permitted to be modified without the approval of mortgagee, or else the landlord and borrower could customize mortgagee rights and solutions without mortgagee's understanding or authorization.
In our experience representing shareholders, the majority of the ground rents we have examined have actually included the foregoing provisions. As we have actually come across more complicated financings, we have actually seen the following major concerns:
Cross-Default - the ground lease and sublease should not cross-default with the trust indenture, loan arrangement or any other bond file (Example: "A default under the Trust Indenture is a default under this Lease ..."). Any event of default under the bond files must supply the trustee the possibility to exercise solutions, not provide the property owner the opportunity to remove the leasehold estate and, as an outcome, the security, unless the trustee cures borrower-sponsor's default.
Third Party Beneficiary - the ground lease and sublease should acknowledge the trustee and any follower trustee as third-party beneficiaries. This can be done by including a provision that designates any leasehold mortgagee as a third-party beneficiary that can impose the arrangement against the landlord and the renter. Leasehold mortgagees are not parties to the ground lease, so a third-party beneficiary classification is required to enforce mortgagee securities in the ground lease and sublease versus the landlord and occupant in court. Additionally, if success of the task is dependent on the proprietor and borrower-sponsor conference particular requirements or offering particular services under the ground lease or sublease, the third-party beneficiary classification is needed for the leasehold mortgagee to implement those provisions against the parties if they fail to meet expectations.
Borrower Notices and Consents - if the task is a lease-sublease structure where the borrower-sponsor is the occupant under the ground lease and the property owner under the sublease, the borrower-sponsor must have no consent rights on any mortgagee matters under the ground lease or the sublease. The borrower-sponsor as ground lease occupant and sublease property owner is more of a passthrough entity for the job till the bonds are paid, while the borrower-sponsor as developer and manager is a true party-in-interest to the job. Just as designers and managers usually do not have permission rights to adjustments of the security, the borrower-sponsor ought to not have those consent rights to the mortgage in the job. It grants the borrower-sponsor major take advantage of in a workout versus shareholders. If the borrower-sponsor has authorization rights over mortgages in the sublease, for example, it might prevent the execution of a mortgage on the subleasehold estate over overdue management and designer costs that are subordinate to debt service.
Shared Parcels - the ground lease and sublease must be on their own partitioned plot, not part of a bigger cost estate parcel. When ground lease projects belong to a larger charge estate parcel, the project is at danger of unassociated actions and charges on the fee estate. For example, if a proprietor that has ground rented part of the cost residential or commercial property to a project, moneyed by bonds and secured by a leasehold mortgage, decides to develop the rest of the residential or commercial property on the charge estate and protect it by a cost mortgage, a foreclosure of that cost mortgage would snuff out the leasehold and subleasehold estates. Similarly, if the proprietor's charge job sustains taxes, utility charges, property owners association charges or other costs that have the prospective to become "incredibly liens" exceptional to the leasehold estate, a foreclosure of those liens would end the ground lease and sublease. If the ground lease and sublease need to be part of a bigger cost parcel, the ground lease and sublease should (a) need that any mortgage or lien put on the fee interest is subordinate to the ground lease, (b) need that the property owner promptly pays any charges or charges that runs the risk of the leaseholds, and (c) permit for the borrower-sponsor and the leasehold mortgagee to cure charges on the fee estate and look for repayment from the property owner.
Multiple Mortgagees - The ground lease should acknowledge the potential for numerous mortgagees and prioritize the most senior mortgagee. We have experienced projects with multiple mortgagees where the mortgagees do not have an intercreditor arrangement. In those cases, either the secondary mortgagees are subordinate to the senior mortgagees based upon time of recording and the other bond files, or the secondary mortgagees have a springing security interest that connects as soon as the senior bonds are settled. Because there is no intercreditor agreement, the offer is silent as to settlement treatments upon an event of default. Subordinate mortgagees, who typically have a closer relationship with the borrower-sponsor and misaligned interest with the senior mortgagees, too frequently take the reins working out with property owners in an exercise without alerting or speaking with the senior mortgagees. Either the ground lease ought to clarify that the property manager will focus on the most senior secured mortgagee in settlement and conflict resolution, and/or an intercreditor contract with clear guidelines must be recorded on the task.
Before buying a ground lease job, bondholders should fully understand the project and its dangers. While examining the official statement and engaging with the underwriter, this client alert must act as an extensive list of problems that need to be resolved. In the context of a limited offering, viewpoint purchasers of the bonds have utilize to request our recommended modifications to the ground lease. In those transactions, the majority of landlords belong parties that straight take advantage of the avenue financed project. It would typically benefit property managers for the projects to succeed, and a failure to work out in great faith or a termination of the ground lease with a leasehold mortgage would adversely impact their reputation and ranking in the bond market. If any of these securities are not included when the bonds are provided, it is critical to obtain them in an exercise as a condition for forbearance or refinancing.
