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The bulk of the tasks include tax-exempt lessor structures. Since federal government entities and not-for-profit organizations are exempt from genuine residential or commercial property taxes in most jurisdictions, a ground lease in 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 arrangement, both of which can supply substantial savings over the life of a job.

In greater education, universities normally use conduit financed ground lease structures to build student housing tasks. These tasks include a ground lease in between a university, as property manager, and the borrower-sponsor, as renter. The university concurs to the ground lease because, given that the borrower-sponsor is accountable for repayment of the bonds and the mortgage is on the leasehold, the university can construct a task on school without sustaining financial obligation and keep the project for complimentary once the ground lease is terminated. During the term of the ground lease, the arrangements of the ground lease supplies a means for the university to manage or monitor the job and get an annual ground lease rent.

In other markets, the company often owns the land and ground rents the land on which the job is to be built to the borrower-sponsor, who constructs the project and subleases it back to the issuer. Such a project certifies for a real residential or commercial property tax exemption due to the fact that it is owned by a federal government entity, and given that the government entity is also occupant under the sublease, the task receives sales tax exemptions on materials during construction. The company, as tenant under the sublease, is accountable for payment of the bonds, while the borrower-sponsor establishes and operates the project pursuant to conditions of agreements with the provider. The borrower-sponsor normally has an opportunity to acquire the land and project as soon as the bonds are paid.

These structures present unique risks to bond purchasers. The bonds are usually secured by mortgages on the leasehold and/or subleasehold estates. Bondholders need to be mindful of the rights of parties to terminate the ground lease or disrupt their ability to work out treatments. If the ground lease is terminated or the trustee can not acquire the task, the corresponding lien on the physical project is snuffed out and the security plan has no value.

With that in mind, bondholders should look for the following protections in any ground lease that is part of a community bond funding:

Term - the term of the ground lease ought to be at least five years beyond the maturity date of the bonds, and shareholders need to promote more if at all possible. The extra five or more years permits an exercise and extension of the term of the bonds in case it is needed to permit the task to capital to cover business expenses and financial obligation service. If the bonds on a project have a bullet maturity, the term of the ground lease must be at least double the term of the bonds to enable a refunding of the developing bonds.

Authorization - the ground lease should clearly license 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 should be assignable by the trustee without limitations. 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 permit the trustee to designate another entity to take position in lieu of the trustee because the financing structure might count on the status of borrower-sponsor to maintain the tax-exempt status of the bonds and/or supply other tax benefits. Additionally, such designee must be entitled to a new lease to assist in the restructuring of the job upon foreclosure or assignment-in-lieu of foreclosure.

Notice and Opportunity to Cure - any notification of default by the tenant under the ground lease must be offered to the trustee, and the trustee should have a chance to treatment of a minimum of 30 days. An uncured occasion of default of tenant under the ground lease normally grants the lessor the right to terminate the ground lease, which would eliminate the trustee's security. A notification and opportunity to cure allows the trustee to protect its security and later seek repayment for such expenses of debtor 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 opportunity to enter into a brand-new lease on the very same terms.

No Modification - the ground lease should not be permitted to be customized without the consent of mortgagee, or else the property manager and borrower might modify mortgagee rights and solutions without mortgagee's knowledge or consent.

In our experience representing bondholders, most of the ground rents we have evaluated have actually included the foregoing arrangements. As we have experienced more intricate financings, we have seen the following severe concerns:

Cross-Default - the ground lease and sublease should not cross-default with the trust indenture, loan contract 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 files need to supply the trustee the possibility to work out remedies, not offer the landlord the opportunity to eliminate the leasehold estate and, as a result, the collateral, unless the trustee cures borrower-sponsor's default.

Third Party Beneficiary - the ground lease and sublease need 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 impose the contract versus the proprietor and the renter. Leasehold mortgagees are not celebrations to the ground lease, so a third-party recipient designation is needed to implement mortgagee defenses in the ground lease and sublease against the property manager and renter in court. Additionally, if success of the project depends on the property owner and borrower-sponsor meeting specific standards or using particular services under the ground lease or sublease, the third-party recipient designation is required for the leasehold mortgagee to implement those provisions against the parties if they fail to fulfill expectations.

Borrower Notices and Consents - if the job is a lease-sublease structure where the borrower-sponsor is the tenant under the ground lease and the property manager under the sublease, the borrower-sponsor must have no permission rights on any mortgagee matters under the ground lease or the sublease. The borrower-sponsor as ground lease tenant and sublease property owner is more of a passthrough entity for the job till the bonds are paid, while the borrower-sponsor as designer and supervisor is a real party-in-interest to the job. Just as designers and supervisors usually do not have authorization rights to modifications of the collateral, the borrower-sponsor should not have those consent rights to the mortgage in the project. It grants the borrower-sponsor major leverage in a workout against shareholders. If the borrower-sponsor has permission rights over mortgages in the sublease, for instance, it might avoid the execution of a mortgage on the subleasehold estate over unsettled management and developer fees that are secondary to financial obligation service.

Shared Parcels - the ground lease and sublease need to be on their own subdivided plot, not part of a larger fee estate parcel. When ground lease jobs are part of a bigger charge estate parcel, the job is at danger of unrelated actions and charges on the charge estate. For instance, if a landlord that has ground leased part of the charge residential or commercial property to a project, moneyed by bonds and protected by a leasehold mortgage, chooses to develop the remainder of the residential or commercial property on the fee estate and protect it by a cost mortgage, a foreclosure of that cost mortgage would extinguish the leasehold and subleasehold estates. Similarly, if the landlord's charge job incurs taxes, utility charges, homeowners association charges or other expenses that have the possible 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 should become part of a bigger charge parcel, the ground lease and sublease need to (a) need 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 charges that runs the risk of the leaseholds, and (c) enable for the borrower-sponsor and the leasehold mortgagee to cure charges on the cost estate and look for repayment from the property manager.

Multiple Mortgagees - The ground lease ought to recognize the potential for multiple mortgagees and focus on the most senior mortgagee. We have actually come across projects with multiple mortgagees where the mortgagees do not have an intercreditor arrangement. In those cases, either the secondary mortgagees are subordinate to the senior mortgagees based upon time of recording and the other bond files, or the secondary mortgagees have a springing security interest that attaches once the senior bonds are settled. Because there is no intercreditor contract, the deal is quiet as to negotiation procedures upon an event 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 in an exercise without alerting or consulting the senior mortgagees. Either the ground lease must clarify that the landlord will prioritize the most senior protected mortgagee in settlement and disagreement resolution, and/or an intercreditor contract with clear standards should be taped on the task.

Before purchasing a ground lease task, bondholders must fully comprehend the job and its dangers. While examining the main declaration and engaging with the underwriter, this client alert need to work as a detailed checklist of problems that should be attended to. In the context of a limited offering, viewpoint buyers of the bonds have leverage to request our suggested changes to the ground lease. In those deals, most landlords relate celebrations that directly benefit from the channel financed task. It would normally benefit property managers for the tasks to be successful, and a failure to work out in good faith or a termination of the ground lease with a leasehold mortgage would adversely affect their credibility and rating in the bond market. If any of these protections are not included when the bonds are released, it is crucial to obtain them in a workout as a condition for forbearance or refinancing.