Most of the projects include tax-exempt lessor structures. Since federal government entities and nonprofit companies are exempt from genuine residential or commercial property taxes in many jurisdictions, a ground lease between such entities and a borrower-sponsor provides a task the chance to either be exempt from residential or commercial property taxes or subject to a payment-in-lieu of taxes plan, both of which can offer considerable cost savings over the life of a project.

In higher education, universities normally use channel funded ground lease structures to construct trainee housing tasks. These jobs include a ground lease between a university, as property owner, and the borrower-sponsor, as renter. The university concurs to the ground lease because, given that the borrower-sponsor is accountable for payment of the bonds and the mortgage is on the leasehold, the university can develop a job on campus without incurring debt and keep the job free of charge once the ground lease is ended. During the term of the ground lease, the arrangements of the ground lease offers a way for the university to control or monitor the task and get a yearly ground lease rent.

In other industries, the company often owns the land and ground leases the arrive at which the job is to be constructed to the borrower-sponsor, who constructs the job and subleases it back to the company. Such a task qualifies for a real residential or commercial property tax exemption due to the fact that it is owned by a government entity, and considering that the government entity is likewise occupant under the sublease, the project receives sales tax exemptions on materials throughout building and construction. The issuer, as tenant under the sublease, is responsible for payment of the bonds, while the borrower-sponsor develops and operates the project pursuant to conditions of arrangements with the company. The borrower-sponsor normally has an opportunity to acquire the land and task once the bonds are paid.

These structures present special threats to bond purchasers. The bonds are normally protected by mortgages on the leasehold and/or subleasehold estates. Bondholders must be conscious of the rights of celebrations to terminate the ground lease or interfere with their capability to work out solutions. If the ground lease is ended or the trustee can not seize the task, the corresponding lien on the physical task is snuffed out and the collateral bundle has no worth.

With that in mind, bondholders should seek the following defenses in any ground lease that is part of a municipal bond financing:

Term - the term of the ground lease must be at least 5 years beyond the maturity date of the bonds, and shareholders must press for more if at all possible. The extra five or more years permits a workout and extension of the regard to the bonds in the occasion it is required to enable the job to cash circulation to cover operating costs and financial obligation service. If the bonds on a task have a bullet maturity, the term of the ground lease need to be at least double the regard to the bonds to permit for a refunding of the maturing bonds.

Authorization - the ground lease need to clearly authorize the borrower-sponsor to incur a mortgage on the ground lease otherwise a court would think about the lien on the leasehold estate invalid.

Transfer and Assignment - the ground lease need to be assignable by the trustee without restrictions. Failure to include such provisions could prevent 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 provisions to allow for the trustee to designate another entity to take position in lieu of the trustee considering that the financing structure may depend on the status of borrower-sponsor to preserve the tax-exempt status of the bonds and/or supply other tax advantages. Additionally, such designee needs to be entitled to a new lease to help 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 supplied to the trustee, and the trustee needs to have a chance to remedy of a minimum of one month. An uncured occasion of default of occupant under the ground lease typically approves the lessor the right to end the ground lease, which would get rid of the trustee's security. A notice and chance to cure permits the trustee to maintain its security and later seek compensation for such costs of customer under the leasehold mortgage, trust indenture or other bond documents.

New Lease - if the ground lease is ended for any reason, like termination upon default, or is rejected in bankruptcy, the trustee needs to have the opportunity to get in into a new lease on the exact same terms.

No Modification - the ground lease need to not be allowed to be modified without the approval of mortgagee, or else the property manager and customer could modify mortgagee rights and treatments without mortgagee's understanding or approval.

In our experience representing bondholders, the majority of the ground leases we have evaluated have actually consisted of the foregoing provisions. As we have experienced more intricate financings, we have seen the following serious issues:

Cross-Default - the ground lease and sublease should not cross-default with the trust indenture, loan agreement or any other bond document (Example: "A default under the Trust Indenture is a default under this Lease ..."). Any event of default under the bond documents need to supply the trustee the chance to exercise treatments, not offer the property owner the chance to remove the leasehold estate and, as a result, the collateral, unless the trustee treatments borrower-sponsor's default.

Third Party Beneficiary - the ground lease and sublease ought to acknowledge the trustee and any successor trustee as third-party beneficiaries. This can be done by consisting of a provision that designates any leasehold mortgagee as a third-party recipient that can implement the arrangement against the landlord and the tenant. Leasehold mortgagees are not parties to the ground lease, so a third-party recipient classification is needed to implement mortgagee protections in the ground lease and sublease versus the proprietor and tenant in court. Additionally, if success of the task is reliant on the property owner and borrower-sponsor meeting certain requirements or offering specific services under the ground lease or sublease, the third-party recipient classification is required for the leasehold mortgagee to impose those arrangements versus the parties if they fail to meet expectations.

Borrower Notices and Consents - if the project is a lease-sublease structure where the borrower-sponsor is the renter under the ground lease and the property manager under the sublease, the borrower-sponsor ought to have no approval rights on any mortgagee matters under the ground lease or the sublease. The borrower-sponsor as ground lease occupant and sublease property manager is more of a passthrough entity for the project until the bonds are paid, while the borrower-sponsor as designer and manager is a real party-in-interest to the project. Just as designers and managers usually do not have approval rights to modifications of the collateral, the borrower-sponsor must not have those authorization rights to the mortgage in the task. It grants the borrower-sponsor major take advantage of in an exercise against bondholders. If the borrower-sponsor has permission rights over mortgages in the sublease, for instance, it could avoid the execution of a mortgage on the subleasehold estate over overdue management and developer charges that are secondary to financial obligation service.

Shared Parcels - the ground lease and sublease should be on their own partitioned plot, not part of a bigger charge estate parcel. When ground lease jobs become part of a bigger charge estate parcel, the job is at threat of unrelated actions and charges on the cost estate. For example, if a proprietor that has ground leased part of the fee residential or commercial property to a project, moneyed by bonds and protected by a leasehold mortgage, decides to establish the remainder of the residential or commercial property on the charge estate and secure it by a fee mortgage, a foreclosure of that charge mortgage would extinguish the leasehold and subleasehold estates. Similarly, if the property manager's cost project sustains taxes, energy charges, homeowners association costs or other expenses that have the possible to become "extremely liens" remarkable to the leasehold estate, a foreclosure of those liens would terminate the ground lease and sublease. If the ground lease and sublease must belong to a bigger cost parcel, the ground lease and sublease must (a) require that any mortgage or lien put on the cost interest is secondary to the ground lease, (b) need that the proprietor without delay pays any charges or costs that runs the risk of the leaseholds, and (c) allow for the borrower-sponsor and the leasehold mortgagee to treat charges on the charge estate and seek reimbursement from the property owner.

Multiple Mortgagees - The ground lease need to recognize the capacity for several mortgagees and focus on the most senior mortgagee. We have actually experienced jobs with numerous mortgagees where the mortgagees do not have an intercreditor contract. In those cases, either the subordinate mortgagees are secondary to the senior mortgagees based on time of recording and the other bond documents, or the subordinate mortgagees have a springing security interest that connects as soon as the senior bonds are settled. Because there is no intercreditor contract, the offer is silent as to negotiation treatments upon an occasion of default. Subordinate mortgagees, who generally have a closer relationship with the borrower-sponsor and misaligned interest with the senior mortgagees, too often take the reins working out with property managers in an exercise without alerting or seeking advice from the senior mortgagees. Either the ground lease need to clarify that the property owner will prioritize the most senior secured mortgagee in negotiation and dispute resolution, and/or an intercreditor contract with clear standards need to be recorded on the task.

Before investing in a ground lease project, shareholders need to totally comprehend the task and its dangers. While evaluating the main declaration and engaging with the underwriter, this customer alert need to function as a thorough list of concerns that must be resolved. In the context of a minimal offering, perspective purchasers of the bonds have utilize to request our suggested changes to the ground lease. In those deals, most proprietors belong parties that straight benefit from the conduit funded task. It would usually benefit property owners for the tasks to prosper, and a failure to work out in great faith or a termination of the ground lease with a leasehold mortgage would adversely impact their track record and ranking in the bond market. If any of these securities are not consisted of when the bonds are provided, it is vital to acquire them in a workout as a condition for forbearance or refinancing.