Whether you are a debtor or a lending institution, if you are considering 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 owner's cost interest in the land or (b) arrangements to safeguard the lending institution (as leasehold mortgagee) from particular threats that could arise as a result of the borrower having a leasehold interest in the land rather of charge ownership. The so-called "subordinated charge" referred to in stipulation (a), above, is less common and basically enables a charge mortgage. According, the leading ten to consider below focus on securities required 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 choose (or may need) that the ground lease not be a sublease. A sublease would need additional review related to the prime lease and can create extra intricacies. The lender might enforce requirements for additional security and/or securities and assurances if the ground lease is a sublease.

2. Fixed Rent.

The loan provider will wish to be able to quantify its danger if it should deal with taking back the residential or commercial property in foreclosure. Should it step into the shoes of the debtor as lessee under the ground lease, it will would like to know that the lease is fixed or at least foreseeable, ideally with restricted or no escalations.

3. Long Term.

Leasehold loan providers choose that the regard to the ground lease be substantially longer than the term of the loan since the lender will desire an adequately long period of time after foreclosure to attempt to recuperate its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly brief remaining term can be bothersome.

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 loan provider will also want the right to work out any renewal options even if the borrower/ground lessee remains in default or has actually failed to work out the renewal options. The same uses to any purchase alternatives, which the lender will likewise desire the right to work out in case it identifies that its best course of action is to buy out the fee owner's/ ground lessor's interest in the land.

5. Broad Use Clause.

The lender will desire broad rights to utilize the residential or commercial property, without unnecessary restrictions. After foreclosure, the lender might require to alter 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 enhance income. The lender will not wish to need to look for approval of the ground lessor for a change in use.

6. No Merger Clause.

The ground lease need to include a "no merger" provision that the estates and interests of the ground lessor and the ground lessee do not "merge" if the ground lessee gets the ground lessor's fee interest in the residential or commercial property. A merger problem could occur, for example, if the ground lessee exercises a choice to purchase that might have been given under the ground lease. The "no merger" provision is intended to avoid such a merger from eliminating the loan provider'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 lending institution's point of view, the ground lease must offer that, in the event of foreclosure, the leasehold lender will only have liability during its duration of ownership and will not have continuing liability after its sale and/or project of its interest in the residential or commercial property.

8. Few Personal Covenants.

The ground lease must contain couple of, 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, usually are not capable of cure by the leasehold lending institution 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 must include a reveal right for the ground lessee to participate in a leasehold mortgage, vowing as security its ground lease interest in the land in addition to its interest in the enhancements. The lender will likewise wish to see a waiver of any property owner's lien that may otherwise be offered to the ground lessor under suitable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lending institution will need that the leasehold mortgage manages using earnings of casualty and condemnation, as opposed to any contrary arrangement in the ground lease. The lending institution has an interest in the use of such profits and whether they are used for restoration or restoring or are applied to the loan balance, and the loan provider will desire such earnings used as offered in the mortgage. With regard to condemnation, the ground lessor does have a recurring interest in the land so the ground lease might offer that an award for a short-lived taking is payable to the ground lessee for the short-term loss of use of the residential or commercial property. For a partial taking, the award might be used to rebuilding or repair, and for an overall taking, the award might be used initially to payment of the loan and then equitably dispersed to the ground lessee and ground lessor.

Conclusion

The foregoing is a quick overview of how particular fundamental terms of a ground lease are viewed from the lender's viewpoint for a financeable ground lease. The ground lessee would be well served by working out for these provisions upfront 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 remedy rights, waivers of particular defaults and no termination of the ground lease pending foreclosure among others, that are critical too. These provisions may be the subject of future short articles.