Whether you are a borrower or a loan provider, if you are thinking about a loan supported by a ground lease, you need to be sure the ground lease is "financeable." A financeable ground lease includes either (a) "subordination" of the property manager's fee interest in the land or (b) arrangements to secure the loan provider (as leasehold mortgagee) from specific threats that might occur as a result of the borrower having a leasehold interest in the land rather of cost ownership. The so-called "subordinated fee" described in stipulation (a), above, is less common and essentially allows a charge mortgage. According, the leading 10 considerations below focus on securities needed in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.

1. Avoid a Sublease.

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

2. Fixed Rent.

The loan provider will wish to be able to measure its risk if it need to face reclaiming the residential or commercial property in foreclosure. Should it enter the shoes of the borrower as lessee under the ground lease, it will desire to know that the rent is fixed or at least predictable, preferably with limited or no escalations.

3. Long Term.

Leasehold loan providers prefer that the regard to the ground lease be significantly longer than the term of the loan due to the fact that the loan provider will desire an adequately long period of time after foreclosure to attempt to recover its financial investment from the residential or commercial property. Accordingly, ground leases with a relatively brief remaining term can be troublesome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with item 3 above, the loan provider will desire the right to exercise renewal alternatives to be sure that the term will be sufficiently long. The lending institution will also want the right to work out any renewal options even if the borrower/ground lessee is in default or has actually stopped working to work out the renewal alternatives. The exact same applies to any purchase options, which the loan provider will likewise want the right to exercise in case it identifies that its best course of action is to purchase out the fee 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 excessive limitations. After foreclosure, the loan provider may require to alter the usage of the residential or commercial property to assist in the sale, lease or other disposition of the residential or commercial property or to improve earnings. The lender will not wish to need to seek consent of the ground lessor for a modification in use.

6. No Merger Clause.

The ground lease must consist of a "no merger" provision 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 fee interest in the residential or commercial property. A merger issue might develop, for instance, if the ground lessee works out an alternative to buy that might have been approved under the ground lease. The "no merger" provision is meant to avoid such a merger from wiping out the loan provider's leasehold mortgage that might happen 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 lender's point of view, the ground lease should offer 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 task of its interest in the residential or commercial property.

8. Few Personal Covenants.

The ground lease need to consist of couple of, if any, "personal" covenants, that is, arrangements that are personal to, or can just be carried out by, the borrower/ground lessee. Such covenants, if breached, generally are not efficient in cure by the leasehold lending institution before or after foreclosure and might lead to a non-curable default and the risk of termination of the ground lease.

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

The ground lease need to include a reveal right for the ground lessee to enter into a leasehold mortgage, pledging as security its ground lease interest in the land as well as its interest in the improvements. The loan provider will also want to see a waiver of any property manager's lien that might otherwise be available to the ground lessor under suitable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lending institution will require that the leasehold mortgage manages making use of earnings of casualty and condemnation, as opposed to any contrary arrangement in the ground lease. The lender has an interest in making use of such earnings and whether they are used for repair or restoring or are applied to the loan balance, and the lender will want such earnings used as provided in the mortgage. With respect to condemnation, the ground lessor does have a residual interest in the land so the ground lease may offer that an award for a momentary 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 might be applied to restoring or restoration, and for a total taking, the award may be applied first to payment of the loan and after that equitably distributed to the ground lessee and ground lessor.

Conclusion

The foregoing is a quick introduction of how particular fundamental terms of a ground lease are viewed from the loan provider's perspective 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 lending institution to raise these points at the time of loan settlement. There are other essential functions 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 crucial also. These provisions may be the subject of future short articles.