IN LEASEHOLD FINANCING, KEY ISSUES FOR MORTGAGE LENDERS


One of the most important considerations for a long-term ground lease is that the ground lessee’s leasehold interest in the land is “financeable.”

A mortgage lender providing financing to the holder of a leasehold interest must evaluate the ground lease for specific essential criteria to preserve its lien position during the life of the loan and boost the chances of successful refinancing if found Direct Lenders here.

Fee-based mortgages

Nothing in the ground lease should render the ground lessee’s interest and the leasehold mortgage subservient or inferior to a subsequent mortgage provided by the ground lessor on its fee simple estate, according to the prospective leasehold mortgagee. Before closing on the leasehold loan, a lender should confirm no existing mortgage on the ground lessor’s estate.

Assignability/Mortgagability

The ground lessee’s interest should be freely assignable, with the ground lessor having no approval rights over I the ground lessee’s mortgage granting, (ii) the leasehold mortgagee’s realization on the leasehold in a foreclosure action, or (iii) the mortgage lender’s (or its designee’s) sale of the leasehold to a third party buyer after the foreclosure is completed.

Many ground leases require the ground lessee to notify the ground lessor in writing of the mortgage’s granting and the mortgagee’s contact information (which is OK and a good idea). Still, the leasehold mortgagee should be wary of provisions that require the ground lessor’s “consent” to the mortgaging and assignment of the leasehold (which is OK and a good idea). It’s also worth looking through the ground lease to see whether it says that only certain “kinds” of mortgagees are “permitted” or “recognized.” 

For example, some ground leases specify that an “institutional lender” or “financial institution” is the sole recognized and allowed leasehold lender. It is necessary to check these definitions to ensure that they are not too restrictive or restricted (and occasionally updated). 

To allow multi-tiered capital stack financings, “leasehold mortgagee protection” in-ground leases are often “extended” to mezzanine lenders and preferred equity providers, in addition to ensuring that these restrictions do not unreasonably exclude certain types of financing sources.

Notice of Default and an Opportunity to Remedy

The ground lease must include provisions requiring the ground lessor to send the leasehold mortgagee a copy of any notice of default sent to the ground lessee (both notices should be sent at the same time), as well as a separate opportunity for the leasehold mortgagee to cure the ground lessee’s default. 

Another necessary result is the number of “extra” days afforded the mortgagee to effect a cure I for a monetary default (five or ten business days beyond what the ground lessee is afforded is not uncommon) and (ii) for a non-monetary bankruptcy (30 to 60 days beyond what the ground lessee is afforded is also not uncommon, and sometimes, depending on the circumstances, such additional time as may reasonably be required to obtain control of the leasehold property).

Renewal of the Lease

The ability to get a “new lease” from the ground lessor if it is ever terminated, even if it is rejected in a bankruptcy case, is an essential feature of a “financeable” ground lease. 

Before the leasehold mortgagee can earn the right to obtain a new lease and save its investment, the ground lessor will frequently require the leasehold mortgagee to elect or exercise its right to get a new lease within an agreed-upon time frame after the termination of the lease (30 or 60 days is not uncommon) and to cure defaults committed by the prior ground lessee (to the extent such defaults are reasonably curable).

Modifications to the Ground Lease

The ground lessor and the ground lessee should not be able to revise, modify, or agree to terminate the ground lease without the leasehold mortgagee’s prior written agreement. Without a lender consent right or override, the ground lease’s two parties would be allowed to amend the ground lease in a manner that would impair the lender’s collateral and cause the collateral to evaporate if the ground lease were to be terminated.

The Intention

The term of the ground lease should not be overlooked. A ground lease with a limited remaining time (for example, five years) or extension options subject to severe pre-conditions is problematic. It may reduce (or destroy) a lender’s refinancing capacity. For an interest-only loan with a large balloon payment at maturity, for example, a remaining term of at least 20 years beyond the upcoming maturity date is required to maximize the ability to refinance.

Condemnation Insurance Proceeds/Awards

On the one hand, the relationship between the ground lease’s insurance and condemnation obligations and the leasehold mortgage must be handled. According to the mortgage lender, the cash and reward must be used to repair and restore the affected property or be ready to pay off the leasehold mortgage in the event of a casualty and condemnation. 

A mortgage lender must have as much involvement and control as possible in obtaining and deploying these funds. It should be made clear that any conflicting ground lease provisions take precedence over the security instrument’s conditions (whether a mortgage, deed of trust, or deed to secure debt).

Memorandum of Ground Lease

Although it is rarely a contentious issue, the ground lessor and ground lessee should ensure that a memorandum of the ground lease is recorded in the land records to register the tenant’s interest of record and make it easier to obtain leasehold mortgage financing when the time comes to record the applicable security instrument and get title insurance.

Ground leases (particularly older ones) are very unusual to be missing at least some of the necessary aspects that enable the ground lessee’s interest to be utilized for financing. The parties often agree to amend or supplement the present ground lease by adding or refining the missing concept(s) via ground lessor estoppel and lease modification in these situations. 

In the “estoppel” segment, such a document can also provide crucial current information to the prospective mortgage lender, such as confirmation from the ground lessor that I no default exists under the ground lease, (ii) the ground lessor’s fee simple interest has not been burdened, and (iii) the lease has not been amended, except as expressly described in the agreement.

Ground lease financing is complex, so read the ground lease carefully to ensure that the mortgage lender has a comprehensive list of “protections” for its position throughout the loan’s term and improve the odds of a successful loan repayment at maturity.

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