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Most of the jobs involve tax-exempt lessor structures. Since federal government entities and not-for-profit organizations are exempt from real residential or commercial property taxes in most jurisdictions, a ground lease between such entities and a borrower-sponsor provides a job the chance to either be exempt from residential or commercial property taxes or based on a payment-in-lieu of taxes plan, both of which can supply significant cost savings over the life of a project.

In college, universities usually use conduit funded ground lease structures to construct student housing jobs. These tasks consist of a ground lease between a university, as landlord, and the borrower-sponsor, as tenant. The university concurs to the ground lease because, because the borrower-sponsor is accountable for payment of the bonds and the mortgage is on the leasehold, the university can build a job on school without sustaining debt and keep the project totally free once the ground lease is ended. During the regard to the ground lease, the provisions of the ground lease provides a way for the university to regulate or monitor the job and get a yearly ground .

In other markets, the issuer often owns the land and ground leases the arrive at which the task is to be constructed to the borrower-sponsor, who constructs the task and subleases it back to the provider. Such a job gets approved for a genuine residential or commercial property tax exemption since it is owned by a federal government entity, and considering that the federal government entity is likewise tenant under the sublease, the project gets approved for sales tax exemptions on materials throughout building. The issuer, as tenant under the sublease, is responsible for payment of the bonds, while the borrower-sponsor establishes and operates the project pursuant to terms of contracts with the company. The borrower-sponsor generally has a chance to buy the land and task once the bonds are paid.

These structures present unique threats to bond buyers. The bonds are normally protected by mortgages on the leasehold and/or subleasehold estates. Bondholders need to bear in mind the rights of parties to end the ground lease or disrupt their ability to work out solutions. If the ground lease is ended or the trustee can not take ownership of the task, the corresponding lien on the physical task is snuffed out and the security package has no worth.

With that in mind, bondholders ought to seek the following securities in any ground lease that becomes part of a community bond financing:

Term - the term of the ground lease ought to be at least 5 years beyond the maturity date of the bonds, and bondholders need to promote more if at all possible. The extra 5 or more years allows for an exercise and extension of the term of the bonds in case it is needed to enable the job to money circulation to cover business expenses and financial obligation service. If the bonds on a job 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 should explicitly license 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 must be assignable by the trustee without constraints. Failure to include such arrangements could avoid 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 enable the trustee to designate another entity to take position in lieu of the trustee since the funding structure may rely on the status of borrower-sponsor to protect the tax-exempt status of the bonds and/or supply other tax benefits. Additionally, such designee needs to be entitled to a brand-new lease to aid in the restructuring of the task upon foreclosure or assignment-in-lieu of foreclosure.

Notice and Opportunity to Cure - any notification of default by the renter under the ground lease must be offered to the trustee, and the trustee needs to have an opportunity to remedy of at least 1 month. An uncured event of default of occupant under the ground lease typically approves the lessor the right to terminate the ground lease, which would remove the trustee's security. A notification and opportunity to cure permits the trustee to preserve its security and later on look for 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 factor, like termination upon default, or is declined in bankruptcy, the trustee ought to have the chance to participate in a new lease on the very same terms.

No Modification - the ground lease should not be allowed to be modified without the consent of mortgagee, otherwise the proprietor and borrower might modify mortgagee rights and treatments without mortgagee's knowledge or approval.

In our experience representing shareholders, most of the ground rents we have evaluated have actually included the foregoing provisions. As we have come across more complicated financings, we have seen the following major concerns:

Cross-Default - the ground lease and sublease must not cross-default with the trust indenture, loan arrangement or any other bond file (Example: "A default under the Trust Indenture is a default under this Lease ..."). Any event of default under the bond documents should supply the trustee the chance to work out solutions, not provide the landlord the chance to eliminate the leasehold estate and, as an outcome, the security, unless the trustee treatments borrower-sponsor's default.

3rd Party Beneficiary - the ground lease and sublease ought to acknowledge the trustee and any follower trustee as third-party beneficiaries. This can be done by including a provision that designates any leasehold mortgagee as a third-party recipient that can enforce the contract against the property owner and the renter. Leasehold mortgagees are not celebrations to the ground lease, so a third-party recipient classification is required to enforce mortgagee defenses in the ground lease and sublease against the proprietor and tenant in court. Additionally, if success of the task depends on the property manager and borrower-sponsor meeting certain standards or offering certain services under the ground lease or sublease, the third-party recipient classification is needed for the leasehold mortgagee to implement those arrangements versus the celebrations if they stop working 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 landlord under the sublease, the borrower-sponsor ought to have no consent 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 job until the bonds are paid, while the borrower-sponsor as designer and supervisor is a true party-in-interest to the task. Just as designers and managers generally do not have approval rights to adjustments of the collateral, the borrower-sponsor should not have those permission rights to the mortgage in the project. It approves the borrower-sponsor serious leverage in a workout versus bondholders. If the borrower-sponsor has consent rights over mortgages in the sublease, for example, it might prevent the execution of a mortgage on the subleasehold estate over unsettled management and designer charges that are secondary to financial obligation service.

Shared Parcels - the ground lease and sublease must be on their own subdivided plot, not part of a larger fee estate parcel. When ground lease jobs become part of a bigger fee estate parcel, the project is at threat of unassociated actions and charges on the fee estate. For example, if a proprietor that has actually ground leased part of the fee residential or commercial property to a project, moneyed by bonds and secured by a leasehold mortgage, decides to develop the remainder of the residential or commercial property on the fee estate and protect it by a fee mortgage, a foreclosure of that charge mortgage would snuff out the leasehold and subleasehold estates. Similarly, if the proprietor's charge task sustains taxes, energy charges, homeowners association charges or other costs that have the possible to end up being "very liens" remarkable to the leasehold estate, a foreclosure of those liens would terminate the ground lease and sublease. If the ground lease and sublease need to belong to a larger charge parcel, the ground lease and sublease must (a) require that any mortgage or lien placed on the fee interest is subordinate to the ground lease, (b) require that the landlord immediately pays any charges or costs that risks the leaseholds, and (c) permit the borrower-sponsor and the leasehold mortgagee to treat charges on the cost estate and look for compensation from the landlord.

Multiple Mortgagees - The ground lease must acknowledge the potential for multiple mortgagees and focus on the most senior mortgagee. We have experienced jobs with numerous mortgagees where the mortgagees do not have an intercreditor arrangement. In those cases, either the secondary mortgagees are secondary to the senior mortgagees based upon time of recording and the other bond documents, or the secondary mortgagees have a springing security interest that attaches when the senior bonds are settled. Because there is no intercreditor contract, the offer is silent regarding negotiation procedures upon an occasion of default. Subordinate mortgagees, who typically have a closer relationship with the borrower-sponsor and misaligned interest with the senior mortgagees, too typically take the reins working out with property managers in a workout without alerting or consulting the senior mortgagees. Either the ground lease must clarify that the property manager will prioritize the most senior secured mortgagee in negotiation and disagreement resolution, and/or an intercreditor contract with clear standards must be recorded on the task.

Before buying a ground lease job, shareholders need to fully comprehend the task and its dangers. While reviewing the official declaration and engaging with the underwriter, this client alert must function as a detailed list of problems that need to be resolved. In the context of a restricted offering, point of view purchasers of the bonds have utilize to request our recommended modifications to the ground lease. In those transactions, most proprietors relate celebrations that straight gain from the channel financed project. It would typically benefit property owners for the tasks to be successful, and a failure to work out 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 defenses are not included when the bonds are provided, it is important to obtain them in a workout as a condition for forbearance or refinancing.