Whether you are a borrower 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 consists of either (a) "subordination" of the property manager's fee interest in the land or (b) provisions to protect the loan provider (as leasehold mortgagee) from specific risks that could occur as a result of the borrower having a leasehold interest in the land rather of fee ownership. The so-called "subordinated charge" described in stipulation (a), above, is less typical and basically enables a cost mortgage. According, the leading 10 factors to consider below focus on protections required in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.

1. Avoid a Sublease.

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

2. Fixed Rent.

The lending institution will desire to have the ability to quantify its risk if it need to 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 rent is repaired or a minimum of foreseeable, preferably with limited or no escalations.

3. Long Term.

Leasehold lending institutions choose that the term of the ground lease be significantly longer than the term of the loan because the loan provider will desire a sufficiently extended period of time after foreclosure to attempt to recover its financial investment from the residential or commercial property. Accordingly, ground leases with a fairly short staying term can be troublesome.

4. Right to Exercise Renewal and Purchase Options.

Consistent with product 3 above, the loan provider will want the right to exercise renewal alternatives to be sure that the term will be sufficiently long. The lending institution will also desire the right to exercise any renewal options even if the borrower/ground lessee is in default or has actually failed to exercise the renewal options. The same uses to any purchase options, which the lending institution will also desire the right to exercise in case it determines that its best course of action is to purchase out the charge owner's/ ground lessor's interest in the land.

5. Broad Use Clause.

The loan provider will want broad rights to utilize the residential or commercial property, without excessive limitations. After foreclosure, the lender may need to change making use of the residential or commercial property to facilitate the sale, lease or other disposition of the residential or commercial property or to improve profits. The loan provider will not want to need to seek approval of the ground lessor for a modification in usage.

6. No Merger Clause.

The ground lease should 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 obtains the ground lessor's cost interest in the residential or commercial property. A merger issue could develop, for example, if the ground lessee works out a choice to acquire that might have been given under the ground lease. The "no merger" provision is intended to prevent such a merger from eliminating the lending institution's leasehold mortgage that might happen by operation of law if the leasehold interest upon which the mortgage is based disappears if the leasehold estate and fee estate combine.

7. Limited Liability of Lender.

From the lender's viewpoint, the ground lease ought to supply that, in case 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 assignment 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 individual to, or can just be performed by, the borrower/ground lessee. Such covenants, if breached, typically are not efficient in remedy by the leasehold loan provider before or after foreclosure and could lead to 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 need to consist of a reveal right for the ground lessee to participate in a leasehold mortgage, pledging as security its ground lease interest in the land along with its interest in the improvements. The lending institution will likewise want to see a waiver of any landlord's lien that might otherwise be readily available to the ground lessor under appropriate law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lender will need that the leasehold mortgage controls the use of profits of casualty and condemnation, instead of any contrary arrangement in the ground lease. The loan provider has an interest in making use of such proceeds and whether they are utilized for repair or restoring or are applied to the loan balance, and the lending institution will want such profits applied as offered in the mortgage. With respect to condemnation, the ground lessor does have a residual interest in the land so the ground lease may supply that an award for a momentary 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 applied to rebuilding or restoration, and for a total taking, the award might be used first to payment of the loan and after that equitably dispersed to the ground lessee and ground lessor.

Conclusion

The foregoing is a brief overview of how certain basic regards to a ground lease are viewed from the loan provider's point of view for a financeable ground lease. The ground lessee would be well served by negotiating for these provisions in advance and not awaiting a leasehold lending institution to raise these points at the time of loan settlement. There are other important functions of a financeable ground lease, such as remedy rights, waivers of specific defaults and no termination of the ground lease pending foreclosure among others, that are important also. These provisions may be the subject of future short articles.