The bulk of the jobs include tax-exempt lessor structures. Since federal government entities and nonprofit organizations are exempt from genuine residential or commercial property taxes in most jurisdictions, a ground lease between such entities and a borrower-sponsor supplies a job the opportunity to either be exempt from residential or commercial property taxes or based on a payment-in-lieu of taxes plan, both of which can offer considerable savings over the life of a project.

In greater education, universities normally utilize avenue funded ground lease structures to develop student housing jobs. These projects include a ground lease in between a university, as landlord, and the borrower-sponsor, as renter. The university concurs to the ground lease due to the fact that, because the borrower-sponsor is accountable for repayment of the bonds and the mortgage is on the leasehold, the university can develop a project on campus without incurring debt and keep the job totally free once the ground lease is ended. During the regard to the ground lease, the arrangements of the ground lease offers a method for the university to manage or monitor the project and get an annual ground lease rent.

In other industries, the provider frequently owns the land and ground leases the arrive at which the task is to be developed to the borrower-sponsor, who constructs the project and subleases it back to the provider. Such a task receives a real residential or commercial property tax exemption since it is owned by a government entity, and because the federal government entity is also renter under the sublease, the project qualifies for sales tax exemptions on materials during building. The issuer, as tenant under the sublease, is responsible for payment of the bonds, while the borrower-sponsor develops and operates the job pursuant to conditions of arrangements with the company. The borrower-sponsor normally has an opportunity to buy the land and job when the bonds are paid.

These structures present unique threats to bond purchasers. The bonds are usually protected by mortgages on the leasehold and/or subleasehold estates. Bondholders should be conscious of the rights of celebrations to terminate the ground lease or disrupt their capability to exercise treatments. If the ground lease is terminated or the trustee can not acquire the job, the matching lien on the physical project is snuffed out and the security plan has no worth.

With that in mind, shareholders ought to seek the following protections in any ground lease that belongs to a municipal bond funding:

Term - the term of the ground lease should be at least five years beyond the maturity date of the bonds, and bondholders should promote more if at all possible. The extra five or more years enables an exercise and extension of the regard to the bonds in the occasion it is needed to enable the job to capital to cover business expenses and financial obligation service. If the bonds on a project have a bullet maturity, the regard to the ground lease should be at least double the term of the bonds to permit a refunding of the maturing bonds.

Authorization - the ground lease must clearly authorize the borrower-sponsor to incur a mortgage on the ground lease or else a court would consider the lien on the leasehold estate void.

Transfer and Assignment - the ground lease need to be assignable by the trustee without constraints. Failure to consist of such arrangements could avoid a mortgagee from selling or transferring the leasehold estate (by sale or otherwise) upon foreclosure or the execution of an assignment-in-lieu of foreclosure. It is crucial for the arrangements to enable the trustee to another entity to take position in lieu of the trustee given that the financing structure might rely on the status of borrower-sponsor to maintain the tax-exempt status of the bonds and/or offer other tax advantages. Additionally, such designee must be entitled to a new lease to assist in the restructuring of the project upon foreclosure or assignment-in-lieu of foreclosure.

Notice and Opportunity to Cure - any notification of default by the occupant under the ground lease must be supplied to the trustee, and the trustee needs to have a chance to cure of at least thirty days. An uncured occasion of default of tenant under the ground lease normally grants the lessor the right to end the ground lease, which would get rid of the trustee's collateral. A notice and opportunity to cure enables the trustee to preserve its security and later look for compensation for such expenditures of customer under the leasehold mortgage, trust indenture or other bond files.

New Lease - if the ground lease is terminated for any factor, like termination upon default, or is declined in personal bankruptcy, the trustee should have the opportunity to participate in a new lease on the exact same terms.

No Modification - the ground lease must not be allowed to be modified without the approval of mortgagee, or else the property manager and debtor might modify mortgagee rights and solutions without mortgagee's knowledge or approval.

In our experience representing bondholders, the majority of the ground rents we have reviewed have consisted of the foregoing provisions. As we have encountered more complicated financings, we have actually seen the following serious issues:

Cross-Default - the ground lease and sublease must not cross-default with the trust indenture, loan agreement or any other bond file (Example: "A default under the Trust Indenture is a default under this Lease ..."). Any occasion of default under the bond documents need to offer the trustee the opportunity to exercise treatments, not provide the proprietor the chance to eliminate the leasehold estate and, as an outcome, the security, unless the trustee cures borrower-sponsor's default.

Third Party Beneficiary - the ground lease and sublease must recognize 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 enforce the arrangement against the proprietor and the tenant. Leasehold mortgagees are not celebrations to the ground lease, so a third-party beneficiary designation is needed to impose mortgagee protections in the ground lease and sublease versus the property manager and tenant in court. Additionally, if success of the task is reliant on the property manager and borrower-sponsor meeting specific standards or providing particular services under the ground lease or sublease, the third-party beneficiary classification is necessary for the leasehold mortgagee to impose those provisions versus the parties if they stop working to satisfy expectations.

Borrower Notices and Consents - if the task is a lease-sublease structure where the borrower-sponsor is the tenant under the ground lease and the proprietor under the sublease, the borrower-sponsor ought to have no authorization rights on any mortgagee matters under the ground lease or the sublease. The borrower-sponsor as ground lease renter and sublease proprietor is more of a passthrough entity for the job till the bonds are paid, while the borrower-sponsor as developer and manager is a real party-in-interest to the task. Just as developers and managers usually do not have permission rights to adjustments of the security, the borrower-sponsor should not have those consent rights to the mortgage in the task. It grants the borrower-sponsor major take advantage of in an exercise versus shareholders. If the borrower-sponsor has approval rights over mortgages in the sublease, for example, it might prevent the execution of a mortgage on the subleasehold estate over overdue management and designer fees that are subordinate to debt service.

Shared Parcels - the ground lease and sublease need to be on their own partitioned plot, not part of a bigger charge estate parcel. When ground lease jobs are part of a bigger fee estate parcel, the project is at risk of unrelated actions and charges on the charge estate. For circumstances, if a property manager that has ground leased part of the cost residential or commercial property to a task, moneyed by bonds and protected by a leasehold mortgage, decides to develop the remainder of the residential or commercial property on the cost estate and protect it by a charge mortgage, a foreclosure of that cost mortgage would snuff out the leasehold and subleasehold estates. Similarly, if the property manager's cost job incurs taxes, utility charges, house owners association fees or other costs that have the potential to become "super liens" remarkable to the leasehold estate, a foreclosure of those liens would end the ground lease and sublease. If the ground lease and sublease need to become part of a bigger charge parcel, the ground lease and sublease ought to (a) require that any mortgage or lien put on the cost interest is subordinate to the ground lease, (b) require that the landlord promptly pays any charges or charges that runs the risk of the leaseholds, and (c) permit for the borrower-sponsor and the leasehold mortgagee to cure charges on the fee estate and seek compensation from the proprietor.

Multiple Mortgagees - The ground lease ought to recognize the potential for numerous mortgagees and focus on the most senior mortgagee. We have actually experienced projects with multiple mortgagees where the mortgagees do not have an intercreditor agreement. In those cases, either the secondary mortgagees are secondary to the senior mortgagees based on time of recording and the other bond files, or the secondary mortgagees have a springing security interest that connects when the senior bonds are settled. Because there is no intercreditor agreement, the offer is silent regarding settlement procedures upon an occasion of default. Subordinate mortgagees, who generally have a closer relationship with the borrower-sponsor and misaligned interest with the senior mortgagees, frequently take the reins working out with property managers in a workout without informing or consulting the senior mortgagees. Either the ground lease must clarify that the proprietor will focus on the most senior secured mortgagee in negotiation and conflict resolution, and/or an intercreditor agreement with clear guidelines must be recorded on the project.

Before investing in a ground lease task, shareholders need to fully comprehend the task and its threats. While evaluating the official statement and engaging with the underwriter, this client alert need to function as an extensive list of problems that should be attended to. In the context of a minimal offering, point of view buyers of the bonds have utilize to request our suggested modifications to the ground lease. In those transactions, the majority of property managers relate parties that directly take advantage of the conduit financed task. It would generally benefit property managers for the projects to prosper, and a failure to negotiate in excellent faith or a termination of the ground lease with a leasehold mortgage would negatively affect their credibility and rating in the bond market. If any of these protections are not consisted of when the bonds are provided, it is crucial to acquire them in a workout as a condition for forbearance or refinancing.