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What Is a Ground Lease?

• How It Works
• Subordinated vs. Unsubordinated
• Pros and Cons

The Bottom Line

• Alternative Investments
• Real Estate Investing

What Is a Ground Lease? How It Works, Advantages, and Example

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

A ground lease is an agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner.

Key Takeaways

• A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner.
• Ground leases commonly take place between commercial landlords, who typically lease land for 50 to 99 years to tenants who construct buildings on the property.

Tenants who otherwise can't afford to buy land can build property with a ground lease, while landlords get a steady income and retain control over the use and development of their property.

How a Ground Lease Works

A ground lease indicates that improvements will be owned by the property owner unless an exception is created and stipulates that all relevant taxes incurred during the lease period will be paid by the tenant. Because a ground lease allows the landlord to assume all improvements once the lease term expires, the landlord may sell the property at a higher rate. Ground leases are also often called land leases, as landlords lease out the land only.

Although they are used primarily in commercial space, ground leases differ greatly from other types of commercial leases, like those found in shopping complexes and office buildings. These other leases typically don't assign the lessee to take on responsibility for the unit. Instead, these tenants are charged rent in order to operate their businesses. A ground lease involves leasing land for a long-term period—typically for 50 to 99 years—to a tenant who constructs a building on the property.

Tenants generally assume responsibility for all financial aspects of a ground lease, including rent, taxes, construction, insurance, and financing.

A 99-year lease is generally the longest possible lease term for a piece of real estate property. It used to be the longest possible under common law; however, 99-year leases continue to be common but are no longer the longest possible under the law. 

The ground lease defines who owns the land and who owns the building and improvements on the property. Many landlords use ground leases as a way to retain ownership of their property for planning reasons, to avoid any capital gains , and to generate income and revenue. Tenants generally assume responsibility for any and all expenses. This includes construction, repairs, renovations, improvements, taxes, insurance, and any financing costs associated with the property.

Example of a Ground Lease

Ground leases are often used by franchises and big box stores, as well as other commercial entities. The corporate headquarters will normally purchase the land, and allow the tenant/developer to construct and use the facility. There's a good chance that a McDonald's, Starbucks, or Dunkin Donuts near you are bound by a ground lease.

Many of Macy's stores are ground leased. Macy's owns the buildings but still pays rent on the ground the building is on. As of Jan. 28, 2023, Macy's reported long-term lease liabilities of $3 billion. This leased real estate includes small-format stores, distribution centers, office space, and full-line stores.

Some of the fundamentals of any ground lease should include:

• Terms of the lease
• Rights of both the landlord and tenant
• Conditions on financing
• Use provisions
• Title insurance

Subordinated vs. Unsubordinated Ground Leases

Ground lease tenants often finance improvements by taking on debt. In a subordinated ground lease, the landlord agrees to a lower priority of claims on the property in case the tenant defaults on the loan for improvements. In other words, a subordinated ground lease-landlord essentially allows for the property deed to act as collateral in the case of tenant default on any improvement-related loan.

For this type of ground lease, the landlord may negotiate higher rent payments in return for the risk taken on in case of tenant default. This may also benefit the landlord because constructing a building on their land increases the value of their property.

In contrast, an unsubordinated ground lease lets the landlord retain the top priority of claims on the property in case the tenant defaults on the loan for improvements. Because the lender may not take ownership of the land if the loan goes unpaid, loan professionals may be hesitant to extend a mortgage for improvements. Although the landlord retains ownership of the property, they typically have to charge the tenant a lower amount of rent.

Advantages and Disadvantages of a Ground Lease

A ground lease can benefit both the tenant and the landlord.

Tenant Benefits

The ground lease lets a tenant build on property in a prime location they could not themselves purchase. For this reason, large chain stores such as Whole Foods and Starbucks often utilize ground leases in their corporate expansion plans.

A ground lease also does not require the tenant to have a down payment for securing the land, as purchasing the property would require. Therefore, less equity is involved in acquiring a ground lease, which frees up cash for other purposes and improves the yield on utilizing the land.

Any rent paid on a ground lease may be deductible for state and federal income taxes, meaning a reduction in the tenant's overall tax burden.

Landlord Benefits

The landowner gains a steady stream of income from the tenant while retaining ownership of the property. A ground lease typically contains an escalation clause that guarantees increases in rent and eviction rights that provide protection in case of default on rent or other expenses.

There are also tax savings for a landlord who uses ground leases. If they sell a property to a tenant outright, they will realize a gain on the sale. By executing this type of lease, they avoid having to report any gains. But there may be some tax implications on the rent they receive.

Depending on the provisions put into the ground lease, a landlord may also be able to retain some control over the property including its use and how it is developed. This means the landlord can approve or deny any changes to the land.

Tenant Disadvantages

Because landlords may require approval before any changes are made, the tenant may encounter roadblocks in the use or development of the property. As a result, there may be more restrictions and less flexibility for the tenant.

Costs associated with the ground lease process may be higher than if the tenant were to purchase a property outright. Rents, taxes, improvements, permitting, as well as any wait times for landlord approval, can all be costly.

Landlord Disadvantages

Landlords who don't put in the proper provisions and clauses in their leases stand to lose control of tenants whose properties undergo development. This is why it's always important for both parties to have their leases reviewed before signing.

Depending on where the property is located, using a ground lease may have higher tax implications for a landlord. Although they may not realize a gain from a sale, rent is considered income. So rent is taxed at the ordinary rate, which may increase the tax burden.

What Are the Disadvantages of a Ground Lease?

Some of the disadvantages of ground leases include the possibility of property loss, loss of higher income due to market changes if rent increases aren't built into the agreement, and tax drawbacks, such as depreciation and other expenses that can't offset income.

Is a Ground Lease a Good Investment?

It can be. A ground lease lets a tenant build on property in a prime location they could not themselves purchase. They can invest their money in improving the property. On the other hand, a tenant may face restrictions on what they can do with the property.

What Happens When a Ground Lease Expires?

Unless you or your landlord takes specific steps to end the agreement under the lease, it will simply continue on exactly the same terms. You do not need to do anything unless you receive a notice from your landlord.

A ground lease is an agreement in which a tenant can develop property during the lease period, after which it is turned over to the property owner. Ground leases commonly take place between commercial landlords, who typically lease land for 50 years to 99 years to tenants who construct buildings on the property.

Contracts Counsel. " Ground Lease ."

SeekingAlpha. " Macy's: Evaluating The $3.25 Billion of Lease Liabilities ."

U.S. Securities and Exchange Commission. " Macy's, Inc. Reports Fourth Quarter and Full-Year 2022 Results ."

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Article overview.

Do you own land, perhaps with dilapidated property on it? One way to extract value from the land is to sign a ground lease. This will allow you to earn income and possibly capital gains. In this article, we’ll explore,

What is a Ground Lease?

• How to Structure Them
• Examples of Ground Leases
• Pros and Cons
• Commercial Lease Calculator

How Assets America Can Help

Frequently asked questions.

In a ground lease (GL), a tenant develops a piece of land during the lease period. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception.

Importantly, the tenant is responsible for paying all property taxes during the lease period . The inherited improvements allow the owner to sell the property for more money, if so desired.

Common Features

Typically, a ground lease lasts from 35 to 99 years. Normally, the lessee takes a lease on some raw or prepared land and constructs a building on it. Sometimes, the land has a structure already on it that the lessee must demolish.

The GL specifies who owns the land and the improvements, i.e., property that the lessee constructs. Typically, the lessee controls and depreciates the improvements during the lease period. That control reverts to the owner/lessor upon the expiration of the lease.

Apply For Financing

Ground lease subordination.

One important aspect of a ground lease is how the lessee will finance improvements to the land. A key arrangement is whether the landlord will agree to subordinate his priority on claims if the lessee defaults on its debt.

That’s precisely what happens in a subordinated ground lease. Thus, the property deed becomes collateral for the lender if the lessee defaults. In return, the landlord asks for higher rent on the property.

Alternatively, an unsubordinated ground lease maintains the landlord’s top priority claims if the leaseholder defaults on his payments. However this might discourage lenders, who wouldn’t be able to take possession in case of default. Accordingly, the landlord will usually charge lower rent on unsubordinated ground leases.

How to Structure a Ground Lease

A ground lease is more complicated than regular commercial leases. Here are some components that go into structuring a ground lease:

The lease must be sufficiently long to allow the lessee to amortize the cost of the improvements it makes. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. Furthermore, the lessee must make a reasonable return on its investment after paying all costs.

The biggest driver of the lease term is the financing that the lessee arranges. Normally, the lessee will want a term that is 5 to 10 years longer than the loan amortization schedule .

On a 30-year mortgage, that means a lease term of at least 35 to 40 years. However, fast food ground leases with shorter amortization periods might have a 20-year lease term.

2. Rights and Responsibilities

Beyond the arrangements for paying rent, a ground lease has several unique features.

For example, when the lease expires, what will happen to the improvements? The lease will specify whether they revert to the lessor or the lessee must remove them.

Another feature is for the lessor to assist the lessee in obtaining necessary licenses, permits and zoning variances.

3. Financeability

The lender must have recourse to protect its loan if the lessee defaults. This is difficult in an unsubordinated ground lease because the lessor has first priority in the case of default. The lender only has the right to claim the leasehold.

However, one remedy is a clause that requires the successor lessee to use the lender to finance the new GL. The topic of financeability is complex and your legal experts will need to wade through the various intricacies.

Keep in mind that Assets America can help finance the construction or renovation of commercial property through our network of private investors and banks.

4. Title Insurance

The lessee must arrange title insurance for its leasehold. This requires special endorsements to the regular owner’s policy.

5. Use Provision

Lenders want the broadest use provision in the lease. Basically, the provision would allow any legal purpose for the property. In this way, the lender can more easily sell the leasehold in case of default.

The lessor might have the right to consent in any new purpose for the property. However, the lender will seek to restrict this right. If the lessor feels strongly about prohibiting certain uses for the property, it should specify them in the lease.

6. Casualty and Condemnation

The lender controls insurance proceeds stemming from casualty and condemnation. However, this may conflict with the standard wording of a ground lease, which gives some control to the lessor.

Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not property restoration. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission.

Regarding condemnation, lenders insist upon participating in the proceedings. The lender’s requirements for applying the condemnation proceeds and controlling termination rights mirror those for casualty events.

7. Leasehold Mortgages

These are mortgages financing the lessee’s improvements to the ground lease property. Typically, lenders balk at lessor’s maintaining an unsubordinated position with respect to default.

If there is a preexisting mortgage, the mortgagee must agree to an SNDA agreement . Usually, the GL lender wants first priority regarding subtenant defaults.

Moreover, lenders require that the ground lease remains in force if the lessee defaults. If the lessor sends a notice of default to the lessee, the lender must receive a copy.

Lessees want the right to obtain a leasehold mortgage without the lender’s consent. Lenders want the GL to serve as collateral should the lessee default.

Upon foreclosure of the property, the lender receives the lessee’s leasehold interest in the property. Lessors might want to restrict the type of entity that can hold a leasehold mortgage.

8. Rent Escalation

Lessors want the right to increase rents after specified periods so that it maintains market-level rents. A “ratchet” increase offers the lessee no protection in the face of an economic downturn.

Ground Lease Example

As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland.

Starbucks’ concept is to sell decommissioned shipping containers as an environmentally friendly alternative to conventional construction. The first store opened in Seattle, followed by Kansas City, Denver, Chicago, and one in Portland, OR.

It was a rather unusual ground lease, in that it was a 10-year triple-net ground lease with four 5-year options to extend.

This gives the GL a maximum term of 30 years. The rent escalation clause provided for a 10% rent increase every five years. The lease value was just under $1 million with a cap rate of 5.21%.

The initial lease terms , on an annual basis, were:

• 09/01/2014 – 08/31/2019 @ $52,000
• 09/01/2019 – 08/31/2024 @ $57,200
• 09/01/2024 – 08/31/2029 @ $62,920
• 09/01/2029 – 08/31/2034 @ $69,212
• 09/01/2034 – 08/31/2039 @ $76,133
• 09/01/2039 – 08/31/2044 @ $83,747

Ground Lease Pros & Cons

Ground leases have their advantages and disadvantages.

The advantages of a ground lease include:

• Affordability: Ground leases allow tenants to build on property that they can’t afford to buy. Large chain stores like Starbucks and Whole Foods use ground leases to expand their empires. This allows them to grow without saddling the companies with too much debt.
• No Down Payment: Lessees do not have to put any money down to take a lease. This stands in stark contrast to property purchasing, which might require as much as 40% down. The lessee gets to conserve cash it can deploy elsewhere. It also improves its return on the leasehold investment.
• Income: The lessor receives a steady stream of income while retaining ownership of the land. The lessor maintains the value of the income through the use of an escalation clause in the lease. This entitles the lessor to increase rents periodically. Failure to pay rent gives the lessor the right to evict the tenant.

The disadvantages of a ground lease include:

• Foreclosure: In a subordinated ground lease, the owner runs the risk of losing its property if the lessee defaults.
• Taxes: Had the owner simply sold the land, it would have qualified for capital gains treatment. Instead, it will pay ordinary corporate rates on its lease income.
• Control: Without the necessary lease language, the owner might lose control over the land’s development and use.
• Borrowing: Typically, ground leases prohibit the lessor from borrowing against its equity in the land during the ground lease term.

Ground Lease Calculator

This is a great commercial lease calculator. You enter the area, rental rate, and agent’s fee. It does the rest.

Assets America ® will arrange financing for commercial projects starting at $20 million, with no upper limit. We invite you to contact us for more information about our complete financial services.

We can help finance the purchase, construction, or renovation of commercial property through our network of private investors and banks. For the best in commercial real estate financing, Assets America ® is the smart choice.

What are the different types of leases?

They are gross leases, modified gross leases, single net leases, double net leases and triple net leases. The also include absolute leases, percentage leases, and the subject of this article, ground leases. All of these leases provide benefits and drawbacks to the lessor and lessee.

Who pays property taxes on a ground lease?

Typically, ground leases are triple net. That means that the lessee pays the property taxes during the lease term. Once the lease expires, the lessor becomes responsible for paying the property taxes.

What happens at the end of a ground lease?

The land always reverts to the lessor. Beyond that, there are two possibilities for the end of a ground lease. The first is that the lessor takes possession of all improvements that the lessee made during the lease. The second is that the lessee must demolish the improvements it made.

How long do ground leases typically last?

Typically, a ground lease term extends to at lease 5 to 10 years beyond the leasehold mortgage. For example, if the lessee takes a 30-year mortgage on its improvements, the lease term will run for at least 35 to 40 years. Some ground leases extend as far as 99 years.

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Protecting an Interest in a Ground Lease – A Lender’s Perspective

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Lenders are often asked to provide financing secured by a leasehold interest in land evidenced by a ground lease. A ground lease is an agreement between the fee owner of real estate (the ground lessor or landlord) and its tenant (the ground lessee) in which the fee owner leases the land to the tenant. Ground leases are typically for a longer term than a basic space lease and allow the tenant to construct improvements on the land and operate the improvements during the term of the ground lease. Because the collateral for leasehold financing typically consists only of the leasehold rights of its borrower under the ground lease, lenders should carefully review the terms of the ground lease to ensure that it contains certain minimum lender protections.

An astute drafter of a ground lease will consider a future mortgage of the ground lease in its initial preparation of the lease, but often, critical lender protections are not included, and this is especially true of older ground leases. While a landlord is generally not interested in amending the terms of the ground lease to satisfy the requirements of a lender providing leasehold financing, a landlord should understand that the tenant’s interest in the ground lease must be financeable.

In addition to the protections in a lender’s leasehold deed of trust, a lender will often need to request that a ground lease be amended or that a separate agreement regarding ground lease be executed to address any lender protections that may have been omitted from the initial ground lease. Below is an overview of the minimum protections that a lender should consider when financing a loan secured by a ground lease.

• Basic Terms. The term of the ground lease should extend well past the maturity of the loan and should specifically address the tenant’s right to mortgage, sublease and assign the lease. A broad list of permitted uses of the property is preferred to give the tenant, the lender and foreclosure sale purchasers the flexibility to change the use of the property should the initial concept fail. To protect the tenant’s interest in the ground lease and put a third party on notice, the ground lease should be evidenced by a short form memorandum thereof recorded in the real estate records.
• Casualty/Condemnation. A key provision of any ground lease is the use of any casualty or condemnation proceeds relating to the property. Since the improvements located on the land generally belong to and have been constructed by the tenant, the ground lease should provide that any insurance proceeds relating to the destruction of any improvements be paid to the tenant. The lender should require that it be named as the “mortgagee” and “lender’s loss payable” on any insurance covering the improvements and the loan documents should require that such proceeds be paid directly to the lender. Similarly, condemnation proceeds attributable to the leasehold estate and the taking of the improvements should be paid directly to the lender. In addition, the lender should have the ability to participate in any condemnation proceedings to sufficiently protect its rights.
• Notice and Right to Cure. The lender should have the ability to cure any tenant defaults under the ground lease after receiving notice from the landlord. This cure period should be in addition to the time allotted to the tenant since the lender may have to foreclose or appoint a receiver prior to curing the default.
• Acquisition by Lender; Entrance into New Lease . Upon the lender’s foreclosure of its leasehold mortgage or taking of a deed-in-lieu of foreclosure, the lender or any party taking title through the lender should have the right to become the tenant under the ground lease without any further consent by landlord. Similarly, if the bankruptcy of the tenant results in a termination of the ground lease, the lender should have the right to compel the landlord to enter into an identical lease with the lender or successor owner as the new tenant.
• Liability . If the lender or another party taking title through the lender takes title to the leasehold interest, such party should only be liable for those obligations of the tenant from the time that the lender or successor owner takes title to the property. The ground lease should also provide that the landlord cannot seek recovery of any losses from the lender beyond its interest in the property. Finally, following an assignment of the ground lease by the lender to a successor owner, the lender should be released from all obligations and liability under the ground lease.
• Amendments; Fee Mortgages . The ground lease should acknowledge that the ground lease may not be amended, modified or terminated without the prior written consent of any leasehold lender that has notified the landlord of its interest. In addition, the ground lease should prohibit the landlord from mortgaging its fee simple interest in the property without the prior written consent of the leasehold lender or, in the alternative, without first getting a non-disturbance agreement in favor of the leasehold lender from the mortgagee of the fee simple interest.
• Waiver/Subordination of Liens . The ground lease should provide that any liens that the landlord has or may acquire against the property during the term of the loan will either be waived or subordinated to the lien of the leasehold lender.
• Repurchase Rights; Rights of First Refusal . Repurchase rights and rights of first refusal in favor of the landlord should be subordinated to the lien of the leasehold mortgage and specifically identified as inapplicable to a foreclosure of the leasehold interest or taking of a deed-in-lieu of foreclosure. Such a clause is helpful in avoiding the impairment or delay of a leasehold lender’s exercise of its rights and remedies following a loan default.
• Environmental Concerns . A lender should treat the financing of the leasehold estate in land like the financing of a fee simple estate for purposes of environmental due diligence. Any environmental reports and questionnaires required by a lender when financing a fee simple interest in property should similarly be required when financing a ground lease. If environmental issues do exist on the property, the ground lease should clearly address the responsibilities of both the landlord and tenant.

In the event that some or all of these provisions are not contained in the ground lease, a leasehold lender should request that either the ground lease be amended to include them or that the landlord execute and record an agreement in favor of the leasehold lender in which the landlord grants the lender with these rights. In addition, it is good practice to have such agreement incorporate, or have the landlord provide an estoppel certificate as of closing, which confirms that (i) the ground lease has not been amended or modified, (ii) the tenant is not then in default under the ground lease, (iii) all agreements between landlord and tenant are contained in the ground lease, (iv) the landlord is not aware of any prior assignment of the tenant’s interest in the ground lease, and (v) that the landlord has no current right to terminate the ground lease. The lender should have the right to request an estoppel certificate from time to time to confirm that the tenant remains in compliance with the ground lease during the term of the loan.

A tenant’s leasehold interest in land can serve as a valuable piece of collateral, but leasehold lenders must carefully review the ground lease and take the necessary steps to ensure that certain protections are included in the ground lease or in a separately negotiated agreement between the landlord and lender.

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GROUND LEASES by Kimberly M. Reed, ATG Law Clerk

When an owner makes a long-term lease of land only, the lessee is said to have obtained a ground lease. Also called a land lease, a ground lease is commonly for a term of 50 to 99 years. The tenant usually is required to construct a building or maintain and use current improvements on the land as specified in the lease. Specific circumstances and the negotiations between the lessor and lessee significantly determine the make-up and contents of a ground lease instrument, but there are several elements that are typically present. In most cases, the lessee pays all expenses of the real property such as property taxes, insurance, maintenance and financing costs. Operating and related maintenance expenses are often called "pass-throughs" because they are costs that pass through from the owner to the tenant. As a result, the owner-lessor receives payment subject to no deductions. The lease also will likely include provisions regarding any improvements made to the property. For example if the lessee constructs an apartment building on the land, if agreed, at the end of the lease period both the land and the apartment building may revert back to the lessor.

Advantages and Disadvantages

There are several advantages that may motivate a prospective developer or tenant to seek a ground lease rather than a different form of ownership. First, the price of the property should be less than the purchase price of similar properties because the land is not being bought. Second, initial development costs should be drastically reduced, especially during the construction period. With a ground lease, the monthly expenses are fixed at the cost of the rent payment. The developer could also negotiate a rent abatement provision in the agreement that would suspend the requirement of rent payments during the construction period of the project. If the landlord provided a decorating allowance, a specific portion of the rent would be deducted allowing more funds to make improvements to the property. Finally, a ground lease may be the only method to attain a piece of property. The developer may be dealing with a party, such as a non-profit entity, that generally is not disposed to or even permitted to sell the land.

Certain disadvantages tag along with ground leases that otherwise would not be incurred; the importance of successful negotiations is evidenced here. Monthly rent payments may be higher than potential monthly mortgage and interest payments. The shorter the ground lease term, the more difficult it may be to obtain financing. If the lessee was not successful in negotiating the terms and restrictions of the agreement, the lessee may have less flexibility in the development and operation of the property because of the landowner's control. Finally, the lessee may experience difficulties or delay if the lessee later has to negotiate with the lessor's heirs or successors of interest.

Who Uses a Ground Lease?

A ground lease is most often used in the following situations: (1) when the property is leased to a developer who subsequently will make multiple subsidiary leases; (2) when a governmental body, e.g., a town or county, clears land under an urban renewal program and leases the cleared land to a developer; (3) when a non-profit entity, such as a church or charity, cannot sell the property and leases the land; (4) in sale and leaseback transactions, which are a form of financing; and (5) for estate planning purposes. Illinois Real Property Service §4:3 (1988).

Types of Ground Leases

The character of a ground lease varies depending on the needs and negotiations of the parties to the lease agreement. For example, the ground lease may involve a plot of land upon which there currently is no structure and the lessee intends to build one and lease space back to the lessor-owner. In this agreement, the lessor has a more active involvement with the lessee because instead of simply receiving payment on the leased land, the lessor has a substantial interest in the design planning of the building as well as in the future users or occupants of the building. IRPS § 4:1 (1988). The instrument would need to be drafted in a way to stipulate the extent of influence that the lessor would have on the tenant's development plans.

The three most common types of ground leases are single, multiple, and divisible ground leases. These variations are accomplished by rewording or adding provisions to the document. Depending on the circumstances of the specific project, the ground lease may vary in its autonomy from other adjoining ground leases. In cases such as department or grocery stores, office buildings or shopping centers, the best type of ground lease would be a single ground lease with no subsidiary ground leases on the land. This design contains a single leased parcel of land, and the lease does not overlap onto another adjoining fee or other ground lease parcels. In the simplest case, there would be no easements with adjoining parcels. If the lessee at a later point needs to acquire additional adjoining land for expansion purposes, some lessors would require the lessee to purchase the new parcel, convey it to the owner and allow the lessee to lease it back. The benefit of this arrangement is obvious if and when the lease is terminated. At the end of the lease, the lessor-owner acquires the entire developed project and will not have to negotiate additional arrangements for the remaining parcel or continuation of the project. IRPS § 4:6 (1988).

In some instances, a more problematic situation exists where the lessee, usually a developer, is forced to negotiate multiple ground leases to acquire enough property. This happens most often in situations where the developer cannot acquire the entire parcel or when the developer acquires pieces of the parcel at different times. The lessee then must obtain multiple ground leases that may be contingent upon one another. Multiple ground leases may cause many difficulties. First, and most importantly, multiple lease parcels are harder to finance. The lender will want to be absolutely certain that none of the other leases can be terminated, to prevent it from losing its security on the loan. Other problems include resolving the effect of multiple leases upon all of the sublessees, and obtaining appropriate cross-easements and reciprocal agreements between the various parties.

The vast majority of lenders will only approve financing when the mortgaged parcel has a single status or position. As an example, assume the construction of a development will be done in stages as three separate projects. In this case, it will be easier for the developer to obtain financing if the ground lease is divided into separate leases. Each lease would cover a different stage of the development. In this situation, rent is usually apportioned to the underlying land according to size, per square-foot for example, and it is practical for all the ground leases to have identical terms. In this case, divisible ground leases would be appropriate. In a divisible ground lease, none of the individual divided leases can have cross-default provisions. A cross-default clause provides that if the lessee defaults on or terminates the lease containing that provision, that default will trigger a default or termination on some or all of the other leases of the development. Linking the termination of a single lease to the termination of some or the rest of the leases destroys the purpose of having separate leases. At the same time that the separate ground leases are executed the lessor-owner should be required to enter into cross-easements or reciprocal agreements, such that the project will be operated as one unit in spite of the separate leasing and financing. This agreement will provide parking, access, or the operation and management of the entire development. For example, assume that a project involves four adjacent parcels of land that are leased via four separate ground leases. The four parcels of land all share one access road and common parking facilities. There should be a provision in each lease that identifies the access and parking arrangement and provides that default or termination of any of the other ground leases will not affect the right to use the easements or rely upon the reciprocal agreements. This way in the event of the termination of even one ground lease, the entire project may still be a single integrated real estate project. IRPS § 4:8 (1988).

Drafting a Ground Lease

A ground lease, like any other lease, must meet the requirements of a contract. Ground leases, being long-term agreements, always have a term longer than one year. Therefore they must be in writing to satisfy the statute of frauds. 740 ILCS 80/2. Even if a lease meets all the contract requirements, the landlord cannot include provisions that violate another body of law or are contrary to public policy. For example, a lease provision that indemnifies the lessor for any and all damages to the property, even those arising from the lessor's own negligence, is void on public policy grounds regardless if brought under tort or contract theory. 765 ILCS 705/1; Economy Mechanical Industries Inc v T J Higgins Co , 294 Ill App 3d 150, 689 NE2d 199, 228 Ill Dec 327 (1st D 1997). Although ground leases typically run from 50 to 99 years, shorter lease terms of 10-25 years have been successfully negotiated. Citizens National Bank of Downers Grove v Mormon , 78 Ill App 3d 1037, 398 NE2d 49, 34 Ill Dec 374 (1st D 1979). Financing is harder to obtain, however, for leases that have terms of fewer than 50 years.

As mentioned above, there is no typical or traditional form of ground lease instrument. The inclusion or exclusion of specific lease provisions ultimately depends on the needs of the transaction and the negotiations by the parties to the document. A commercial ground lease instrument should always be drafted with the needs of actual or potential lenders in mind. At some point the lessee will probably use the property as security for a loan, for example if intending to make improvements to the property. The opinion of the lender is so important that, if possible, the lender should participate in the lease negotiation process or approve the form of the lease before it is executed.

Guidelines and sample ground lease instruments are available on the websites of many lending institutions, organizations such as the American Land Title Association (ALTA), and in form books. For an example of a ground lease for a condominium project, see Illinois Forms , § 7:46 (2000).

Financing a Ground Lease

Many competing interests must be balanced to finance a ground lease: the needs of the owner-lessor, the owner-lessor's lender, the tenant and the leasehold lender. As mentioned above, if agreed, the leasehold lender should participate in the lease negotiation to ensure that its needs are met. In reality, the leasehold lender is often presented with an executed ground lease and is forced to try to negotiate changes and amendments. Eugene A DiPrinzio, Leasehold Financing and Mortgagee Protections , Probate & Property (July/August 2000).

There are three important lender concerns: (1) the status of the title to the fee underlying the ground lease; (2) that ground leasing is permitted on the property; and (3) determining the rights that the owner's lender might have in relation to the tenants. The lender's primary goal is to secure payment in the event of default or termination of the ground lease. Id . The leasehold lender "will usually insist on subordination of the ground lease to the leasehold mortgage." Id.

An extreme example of the results that can arise because of the failure of a leasehold lender to insist on a minimum amount of protection in the ground lease is a California case, Glendale Federal Bank v Hadden , 73 Cal App 4th 1150 (Cal App Ct, 1999). In Hadden , the leasehold mortgagee did not negotiate a right to cure a tenant's default in the ground lease. The tenant defaulted and the landlord terminated the lease and failed to join the leasehold lender in his unlawful detainer action. The lender claimed that it maintained interest in the terminated leasehold. The court ruled in favor of the landlord and the lender appealed. On appeal, the court held that the mortgagee was not an indispensable party to the unlawful detainer action. The court stated that the mortgagee could have avoided this result by protecting itself against termination of the lease with an agreement with the landlord or an amendment to the lease.

If a ground lease is already negotiated and executed, the lender usually will require a collateral agreement or a collateral assignment of the ground lease to provide certain minimal protections to the lender in case of a default under the lease. These protections may include "the lender's right to cure any tenant default under the ground lease, appropriate notice provisions, exculpation of the lender from liability to the landlord and the exercise of the lender's possessory rights." DiPrinzio, Probate & Property (July/August 2000). Additional protections may be required if the collateral includes items other than real estate interests, such as personal property or equipment. Id.

Title Insurance on a Ground Lease

The majority of leasehold lenders do not require title insurance as a condition for making the loan. However, many of the same reasons for acquiring title insurance for a fee interest carry over to a leasehold interest and make title insurance a worthwhile investment for lessees.

"A title search, and the subsequent issuance of a policy, offers answers to as well as insurance against questions that are important to someone contemplating a lease of real property:

Is the landlord named in the lease the true owner of the premises? Is the consent of a mortgagee needed to lease the premises? Are there any covenants or restrictions of record that prohibit or limit the tenant's intended use, such as might be found in prior leases? Will the tenant's possession of the premises be at risk due to foreclosure of a mortgage? Who are necessary parties to nondisturbance agreements? Are the leased premises subject to any easements or restrictions that may limit development or use of the leased premises?" Matthew J Cholewa, Leasehold Policies: Title Insurance's Neglected Child , ALTA Title News (March/April 1999).

Answers to the above questions will eliminate many of the risks that otherwise would be overlooked until after the agreement and signing of the lease when the leasehold lender makes an investigation into the property and decides whether to approve the financing. Title insurance will provide these answers in advance and provide additional protection for the leasehold lender.

The leasehold policy will contain all of the same Insuring Provisions, Exclusions from Coverage, and Conditions and Stipulations that are contained in a fee owner's title insurance policy but there are two notable additions. A leasehold policy redefines the value of the insured property and adds several items of loss that are not found in a fee owner's policy. The value of a leasehold estate is computed as the difference between the fair market value (undiminished by claimed title defects) and the rent reserved to the lease, all brought to present value. The leasehold is valued at the time of loss, not at the time of entering into the lease. Second, a leasehold estate will include the following items of loss in addition to the lost value of the leasehold estate:

• The cost of removing, relocating, and repairing the insured's personal property within a 25 mile radius;
• Rent or use and occupancy payments that the insured may be obligated to pay a party having paramount title to that of the landlord;
• Post-eviction rent that the insured may be obligated to continue to pay the landlord for the land from which the insured has been evicted;
• Fair market value of the insured's interest in any subleases; and
• Damages that the insured may be obligated to pay a sublessee for breach of a sublease.

Coverage of these costs resulting from an unlawful termination of the lease can be comforting to the leasehold lender as well as to the terminated tenant.

Ground leases provide a long term and often less costly alternative to ownership; however the extent of the benefits directly stems from well-planned and well-executed negotiations between all of the parties involved. One of the major benefits of a ground lease is its flexibility in meeting the needs and requirements of each leasing situation. Just as in a mortgage for a fee interest, the interests of leasehold lenders must be taken into consideration in the planning and drafting of the lease instrument. Lender's counsel, just as lessor and lessee's counsel, must go into negotiations knowledgeable of which needs must be protected above others. Finally, having a title insurance policy on the leasehold proves to be beneficial to the prospective ground lease tenant as well as for a potential lender. The tenant now can enter into a long-term relationship with better security and knowledge about the status of the property, and the lender has a large portion of the background research for its financing decision made without additional expense and hassle.

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Key issues in negotiating financeable ground leases

Jennifer   price matt   buesching july 28, 2017.

Ground leases are generally long-term leases of property entered into between a property owner and tenant where the tenant leases land and subsequently constructs a building or other improvements on that land. Since ground tenants do not own fee title to ground leased property, financing to acquire a ground lease or construct improvements on ground leased property is more complex that conventional mortgage financing. 

A leasehold lender’s primary collateral is the ground lease itself, as opposed to the underlying land and improvements. Like a fee mortgage, if a ground lease tenant defaults on its financing, its leasehold lender will have to foreclose. However, the interest being sold at the foreclosure sale will be a ground lease and the rights thereunder as opposed to a fee interest in the land. This makes the marketability (also referred to as “financeability”) of a ground lease critically important to tenants and leasehold lenders. 

There are several critical elements which must be incorporated into a ground lease in order for the ground lease to be considered “financeable” by a leasehold lender. A few of these key elements are discussed below:

Lengthy Term: Although different leasehold lenders have different requirements for the length of a ground lease, in order to be financeable, the term of a ground lease must extend well beyond the maturity date of the leasehold financing to ensure that there is enough time to amortize the loan, refinance the loan or sell the ground lease to a new tenant in the case of a foreclosure.  

Broad Permitted Use: The permitted use in a ground lease should be as broad as possible so that the leasehold lender has options and a large potential purchase base.  

No Limitations on Leasehold Mortgaging/Assignment/Subletting: Not only does the ground lease need to provide that the leasehold interest can be mortgaged to a leasehold lender without consent, the leasehold lender will want to ensure that it can freely foreclose on the property and further assign the lease or sublet the property without the need to get the fee owner’s consent or other restrictions. 

Leasehold Lender Right to Cure Defaults: The leasehold lender will want the right to cure a default on behalf of the tenant under the ground lease in order to protect its collateral and prevent the landlord from terminating the ground lease. Generally, the leasehold lender will want its cure period to extend beyond the cure period provided to the tenant. Moreover, the leasehold lender will want the landlord to have obligations to enter into a new ground lease with the leasehold lender on the same terms as the existing ground lease in the event the ground lease is terminated due to bankruptcy, default or for any other reason. 

No Amendments without Consent:  Neither the landlord nor the tenant should have the right to amend, modify, terminate or alter the ground lease in any way without the leasehold lender’s consent. 

Priority of Ground Lease over Fee Mortgages: The ground lease should include a requirement that any mortgage or deed of trust placed on the fee owner’s interest in the property is subordinate to the ground lease so that a foreclosure sale by the fee lender does not terminate the ground lease.

The provisions above are just a sample of the terms ground lease tenants and leasehold lenders should look for in order to determine whether or not a ground lease is financeable. Successfully negotiating a financeable ground leases requires a strong understanding of these terms. Legal counsel experienced in negotiating financeable ground leases can be a valuable resource for all parties to a ground lease transaction.

Jennifer Price and Matt Buesching are attorneys in Thompson Coburn’s Real Estate group.

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Ground Lease in Commercial Real Estate

A ground lease is a type of long-term lease agreement that allows the tenant to build on and make significant improvements to the leased property. Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease.

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What is a ground lease in commercial real estate?

A ground lease is a type of long-term lease agreement that allows the tenant to build on and make significant improvements to the leased property. Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease. In general, ground leases are the most similar to triple net leases , or bond leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property.

Most traditional lease agreements provide some ability for a tenant to assign— or transfer, their lease obligation to another tenant. This is also the case in most ground lease agreements, but, since these leases are much longer term and usually involve significantly larger amounts of money, stipulations may be complex. Unlike subleasing, in which the original tenant typically still collects rent from the new tenant, in a lease assignment , a direct relationship is created between the new tenant and the landlord. However, original tenant may still carry some liability should the new tenant default on their lease.

What are the advantages of a ground lease in commercial real estate?

Ground leases provide significant financial flexibility for larger organizations, as they do not require a down payment and can help free up capital for further expansion plans. Additionally, ground leases allow landlords to generate a certain degree of income/profit while still keeping the rights to the land, and potentially selling the property for a profit when the tenant’s ground lease is up.

Ground leases are also similar to triple net leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property.

What are the disadvantages of a ground lease in commercial real estate?

What are the common terms of a ground lease in commercial real estate.

Ground leases usually last between 50-99 years, and generally stipulate that the property and all improvements made during the lease will revert to the landlord after the termination of the lease. In general, ground leases are the most similar to triple net leases , or bond leases, as they require a tenant to pay for property taxes, insurance, maintenance, building repairs, and all other associated costs with operating the property. Most traditional ground lease agreements also provide some ability for a tenant to assign— or transfer, their lease obligation to another tenant. This is also the case in most ground lease agreements, but, since these leases are much longer term and usually involve significantly larger amounts of money, stipulations may be complex. Unlike subleasing, in which the original tenant typically still collects rent from the new tenant, in a lease assignment , a direct relationship is created between the new tenant and the landlord. However, original tenant may still carry some liability should the new tenant default on their lease.

What are the tax implications of a ground lease in commercial real estate?

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Student Corner: On Borrowed Ground: A Ground Lease Primer – Part 2

By CED Program Interns & Students

 Reset – ‘Reappraisal’

Generally, the ground lease is reappraised after a period of 10-20 years at the option of the lessee or property owner. The reappraisal can occur via an updated market value of the land, and therefore, increased cash flow at the same rental rate. Or, the rental rate can be reset to reflect market conditions, or the parties can agree to a predetermined payment increase. Terms regarding the reappraisal process are determined in the initial ground lease contract.

The reappraisal process is among the most contentious points of the ground lease lifespan since the goals of both parties collide: obtaining fair value and steady income versus making project financing and rent untenable. The property owner would likely have his/her cash flow value reduced overtime due to inflation, and land values may have appreciated during the initial term of the lease. As a result, the property owner may not be receiving ‘fair market value’ ground rent at the point in time of the ground lease reappraisal.

However, a reset of the ground lease rent and appraisal may imperil the lessee and financing for the building and improvements. A substantial increase in ground rent may alter the financing structure of the property: less income would be generated since more would be designated for ground rent. Ambiguous terms for how a ground lease is structured, and the basis for renegotiation, must be clearly delineated before the ground lease is signed because a lender would not want to be exposed to unpredictable rent payments.

Additionally, the basis for the reappraisal is a point of contention: the property could be valued based on the present-day highest-and-best use, or the existing use (that of the current lessee engaged in the negotiation).

Given that the developer does not own the property, a lender has to rely upon different terms in order to finance development and a permanent loan since the property may not be outright pledge as collateral. Lending ultimately depends upon whether the property owner subordinates or unsubordinates his/her property to the lender’s loan.

In the subordinated instance, the property owner ‘subordinates’ the interest in his/her property to that of the mortgage loan. If the lessee were to default, then the lender would be able to take possession of the owner’s property, and the terms of the ground lease would be removed. In the unsubordinated instance, the lessee obtains a mortgage leasehold, meaning that the property owner is not subjected to the lender’s terms. If a default were to occur, the lender would assume the lessee’s position as the owner of the building and improvements, and would be obligated to pay rent to the property owner under the ground lease terms.

Despite the clear advantages of a leasehold mortgage for the property owner, he/she may elect to enter into a subordinated agreement. The property would not offer any tangible income to the owner if the lessee does not obtain financing, especially if the property has high income potential. Despite the risk of losing the property, the owner may seek accommodative terms from the lessee, such as increased fees and payments and greater property owner control over the development project.   The absence of property collateral via a leasehold mortgage still allows the development to be financeable. Lenders will command higher loan rates and additional fees, though some lenders do not permit leasehold financing.

The sale, or assignment, of the building and improvements subjected to the ground lease are permitted or else the developer likely would not have undertaken the project. Any terms or process regarding the assignment should be included in the initial ground lease agreement. Based upon the terms of the lease, the property owner may have to agree to any transaction or approve the purchaser, although this is not universal. However, the potential purchaser must be compliant with the ground lease terms, but could engage the property owner on modifying terms of the lease. As noted earlier, much depends upon how a sale process is outlined in the initial agreement.

Ground leases can be relatively complex, time intensive, and costly to negotiate. Professionals within law firms and financial institutions likely specialize in ground lease issues, and are best suited to handle the more complex aspects of such transactions.

John Raymond is a MBA candidate at the Kenan-Flagler Business School at UNC-Chapel Hill. He is also a Fellow with the Development Finance Initiative.

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• Ground Lease Armageddon [2022] mail In any ground leased development project, the land owner wants a creditworthy completion guarantor. But what happens when the lender takes over the project?
• Can a Landlord's Bankruptcy Destroy a Lease? A Third Look at the Qualitech Case [2021] mail The 2003 Qualitech decision caused alarm among leasehold mortgagees. Was the fear justified? Not at first, but then mission creep took hold.
• Model Ground Lease Criteria for CMBS and Other Lenders [2021] mail CMBS and other lenders want ground leases to contain certain provisions. Joshua Stein's Model Ground Lease Criteria summarize the expectations of the secondary market in simple and succinct language.
• Model Term Sheet for Ground Lease (Forms) [2021] mail Ground lease negotiations cover a lot of ground. To avoid the landmines, start from a good term sheet. Joshua Stein just published a template in the Practical Real Estate Lawyer. Don't expect to use all or even most of these items, but consider them a useful checklist.
• The Difference Between Waivers And Consents In A Ground Lease [2021] mail It takes a small change in the choice of words to make a big difference in a ground lease tenant's ability to make its own decisions.
• Can A Lender Use A Routine Closing Document To Change A Ground Lease? [2020] mail Estoppel certificates show up all the time in real estate transactions. But what happens when a lender tries to use an estoppel certificate to change the terms of a ground lease?
• Who Can Hold A Mortgage On A Ground Lease? [2020] mail Ground lease negotiators should revisit the definitions and standards for an "institution," as real estate funds and other non-banks originate more leasehold mortgages.
• Document Bloatation and a Response [2019] mail Document templates tend to grow over time, but there's a way to keep contents a reasonable size, while saving optional provisions to use again in other documents. A ground lease is used as an example.
• Ground Leases Revisited [2019] mail A wealth of knowledge and experience gleaned over the last 15 years is being incorporated into Joshua Stein's completely reworked treatise on ground leases. This article is a preview of what's to come.
• Solving the Ground Rent Problem [2019] mail Ground rent reset clauses have recently produced disasters for tenants. In response, how are tenants protecting themselves in lease negotiations?
• Fee Mortgages in Ground Lease Transactions (With Model Lease Language) [2018] mail In addition to negotiating the terms for rent, leasehold protection for mortgagees and creating a financeable leasehold, the parties to a long-term ground lease need to address another essential issue: a limited set of fee mortgagee protections.
• How Long A Ground Lease? [2018] mail What factors should the parties take into account when setting the term of a ground lease? Are there advantages to making the period less than 99 years? Should tax avoidance or other strategies be considered? This article explains what really matters when negotiating a ground lease.
• The Explosion of Developments Under Ground-Lease Structures [2018] mail Ground leases can be complicated, and have risks and benefits for owners, developers and lenders. When might it be worthwhile for the parties involved to utilize this this increasingly popular structure?
• It Could Happen [2017] mail 300 commercial real estate attorneys in New York City were consulted about six common provisions in long-term ground leases that address things that could happen. But do they ever really happen?
• Moody's Clamps Down on Two Ground Lease Issues [2016] mail Among the panoply of "financeability" issues in any ground lease, two provisions require special care to satisfy the rating agencies. This article examines these two rather technical concerns.
• Comforting the Condemned [2015] mail Condemnation of ground leases may not happen much, but when it does happen how should the parties involved share in the condemnation payment? This article describes the possibilities.
• How New York City and State Transfer Taxes Apply To Ground Leases [2015] mail Ground leases in New York incur lower transfer taxes than an outright sale at a similar valuation, but there's far more complexity involved. This article reviews the issues and results of applying the transfer tax at City and State levels.
• It Seemed Like a Good Idea at the Time: Rights of First Offer and First Refusal [2014] mail Rights of first refusal and rights of first offer (ROFO and ROFR) seem like a great idea, until you actually have to live with one of them. This article explores many ways they can go wrong.
• Leasehold Financing and the Mortgage Priority Conundrum [2014] mail Which mortgage has priority in a ground lease? The landlord's or the tenant's? Or neither? Joshua Stein explains why it's essential to understand from both perspectives the issues in obtaining mortgage financing in order to resolve them correctly. Otherwise, landlord, tenant, or even both parties, may have a difficult time securing financing.
• Model Right of First Offer [2014] mail In this model ROFO clause, the author tried to learn from the litigated cases and the author's own experiences and produce a ROFO clause that might work better than most. It's certainly longer than most.
• The Most Important Issue In Every Ground Lease [2014] mail A brief look at the most crucial issue for every landlord under a ground lease: how to adjust the ground rent over many years, to protect the landlord from inflation.
• Why Rights of First Offer and Rights of First Refusal Don't Work [2013] mail Right of first offer and right of first refusal clauses (ROFO and ROFR) may seem like a good idea, but do they actually work?
• Did the Sky Fall on Leasehold Mortgagees? Ground Lease Financing After Qualitech  [2009] mail In 2003, the Qualitech decision struck fear into the hearts of leasehold mortgagees from coast to coast. Later cases confirm Joshua Stein's opinion at the time that the fear of Qualitech was overstated.
• It Was Part of the Deal -- Ground Rent Resets in Battery Park City [2009] mail The April 20, 2009 Crain's New York Business published an article expressing concern about how adjustments in ground rent would affect condominium owners in Battery Park City. The following week, Crain's published Joshua Stein's response, explaining how and why ground leases work.
• Are Ground Lease Rent Reset Clauses Formulas for Disaster? [2007] mail Long-term ground leases usually contain appraisal-based rent adjustments -- perhaps the single largest source of ground lease litigation. This article explains where the problems lie and how to prevent them.
• Techniques for a Developer to Structure "For Sale" Apartments in a Leasehold Project [2007] mail Condominium developers typically sell units outright to end-users. But what happens if the developer holds only a long-term lease on the building? This article explores possible techniques to sell apartments built on a leasehold.
• New Guide to Ground Leases [2005] Three-volume treatise published in 2024, with encyclopedic discussion of legal and business issues; model ground lease; and two dozen more template documents.
• Ground Leases from the Ground Up [2004] mail Ground leases can offer an excellent opportunity for developers looking to build when the owning party doesn't want to sell, though all sides must consider the potential traps.
• How Much Protection Does a Leasehold Mortgagee Need? [2003] mail A reasonable set of "leasehold mortgagee" protections. Written in (relatively) Plain English and without saying too much or too little.
• Alternatives to Site Acquisition - Ground Leases: An Overview [2000] mail Because a ground lease can meet the needs of all the parties, it can bring about a development project that otherwise might never have occurred. But developer, landlord and lender need to know their liabilities, benefits, risks, and responsibilities, and how they may change over time.

Joshua Stein PLLC Please Note Our New Address: 110 West 57th Street, 4th Floor New York, NY 10019   (212 )  688-3300

Credits & Caveats Lawyer Advertising: Under the NY Rules of Professional Conduct (the "Rules"), this website may contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend on the circumstances of each matter. If you have questions about our conduct under the Rules, please contact us (see contact details on this website). We include this warning only because the Rules may require it, not to insult the intelligence of our clients and friends. Read More About This Website.

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Lease Assignment Agreement

Rating: 4.9 - 137 votes

A Lease Assignment Agreement is a short document that allows for the transfer of interest in a residential or commercial lease from one tenant to another. In other words, a Lease Assignment Agreement is used when the original tenant wants to get out of a lease and has someone lined up to take their place.

Within a Lease Assignment Agreement, there is not that much information included, except the basics: names and identifying information of the parties, assignment start date, name of landlord, etc. The reason these documents are not more robust is because the original lease is incorporated by reference , all the time. What this means is that all of the terms in the original lease are deemed to be included in the Lease Assignment Agreement.

A Lease Assignment Agreement is different than a Sublease Agreement because the entirety of the lease interest is being transferred in an assignment. With a sublease, the original tenant is still liable for everything, and the sublease may be made for less than the entire property interest. A Lease Assignment transfers the whole interest and puts the new tenant in place of the old one.

The one major thing to be aware of with a Lease Assignment Agreement is that in most situations, the lease will require a landlord's explicit consent for an assignment. The parties should, therefore, be sure the landlord agrees to an assignment before filling out this document.

How to use this document

This Lease Assignment Agreement will help set forth all the required facts and obligations for a valid lease assignment . This essentially means one party (called the Assignor ) will be transferring their rights and obligations as a tenant (including paying rent and living in the space) to another party (called the Assignee ).

In this document, basic information is listed , such as old and new tenant names, the landlord's name, the address of the property, the dates of the lease, and the date of the assignment.

Information about whether or not the Assignor will still be liable in case the Assignee doesn't fulfill the required obligations is also included.

Applicable law

Lease Agreements in the United States are generally subject to the laws of the individual state and therefore, so are Lease Assignment Agreements.

The Environmental Protection Agency governs the disclosure of lead-based paint warnings in all rentals in the States. If a lead-based paint disclosure has not been included in the lease, it must be included in the assignment. Distinct from that, however, required disclosures and lease terms will be based on the laws of the state, and sometimes county, where the property is located.

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A guide to help you: Tenants and Subtenants Obligations under a Sublease Agreement

Other names for the document:

Assignment Agreement for Commercial Lease, Assignment of Commercial Lease, Assignment of Lease, Assignment of Residential Lease, Assignment Agreement for Lease

Country: United States

Housing and Real Estate - Other downloadable templates of legal documents

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• Parking Space Lease Agreement
• Short-Term Lease Agreement
• Tenant Security Deposit Return Request
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What cre lenders should know about a ground lease (4 tips).

Leasing the ground. Sounds a little strange, right?

As it turns out, ground leases are an increasingly popular option for commercial real estate (CRE) developers. For CRE lenders, that means it’s important to understand how a ground lease works, and how it can impact a project’s financing.

In this article, we cover the information and tips CRE lenders need to know about them, including:

• What is a ground lease?
• Tips for lending with a ground lease in place

What Is A Ground Lease?

A ground lease, also known as a land lease, is basically what its name suggests. Rather than purchasing the land outright, it allows a developer or other interested party (also known as the lessee or tenant) to lease the rights to a piece of land, while the land’s owner (also known as the lessor or landlord) retains the ownership interest. Similar to any other lease, the lessee is obligated to pay a recurring fee for the right to use the land, and is restricted by certain guidelines outlined in the lease.

Since most ground leases are created with the intention of pursuing a new development, they are typically long-term leases that can range anywhere from 10 to 20 years to upwards of 99 years. Once the lease term is over, the lessor regains control over the land and will own anything constructed on it.

Typically the lessor of a ground lease is an institution or group that plans to be around long enough to see the end of the lease, such as state institutions, government entities and religious organizations. However, there is nothing restricting an individual from leasing their land if they choose.

One way to think of a ground lease is that it’s a form of interest-only debt. The lessee is typically not obligated to make a down payment like they would if they purchased the land outright, and since no principal payments are being made the lessee will not own the property at the end of the term.

Tips For Lending With A Ground Lease In Place

Lending on a project involving a ground lease is a potentially profitable endeavor for CRE lenders, but there are a few differences and potential risks compared to traditional lending that lenders should keep in mind. We’ve outlined four tips for navigating those differences and risks below.

1. Look For A Subordinated Ground Lease

Unlike a typical development loan that would use the borrower’s ownership in the land as collateral, a loan involving a ground lease uses the ground lease itself as collateral. Because of this, lenders need to understand the difference between an unsubordinated and subordinated ground lease.

In an unsubordinated ground lease, the lender is not allowed to foreclose on the land itself in the event of default by the borrower because the landowner maintains a superior position. This means the only recourse available to the lender is to attempt to take ownership of any improvements performed by the borrower. If the borrower has not performed any improvements or the improvements are not completed, the lender could be stuck with an asset of little to no value. As you might guess, an unsubordinated ground lease is not an ideal situation from the lender’s perspective.

On the other hand, a subordinated ground lease puts the lender in a superior position to the landowner and allows the lender to foreclose on both the improvements and the land itself in the event of the borrower’s default. This puts the lender in an ideal position, giving them a higher level of recourse and lessening the reliance on the borrower’s improvements. Although the landowner would prefer an unsubordinated lease, a subordinated lease is the best option for the lender.

If a lender wishes to make a loan on a project involving a ground lease, they should ask that it be subordinated, if possible. While loans could still be made with an unsubordinated one in place, it puts the lender at a disadvantage and creates a higher level of risk.

2. Understand The Lease Provisions

As with any lending decision, lenders should thoroughly review the provisions outlined in the ground lease prior to lending any money to the borrower.

Are there any restrictions on the type of property that can be constructed? Are there size limitations? Does the borrower have to meet certain construction timelines? Once the property is built, who has the final say on setting the rental rate and selecting tenants?

The answers to these questions and others like them will all be outlined in the ground lease documents. It is vital that the lender understand the answers to these questions and their impact on the overall risk of the project.

3. Limit Opportunities For Changes Or Termination

As mentioned earlier, the primary form of collateral available in a transaction involving a ground lease is the lease itself. Because of this, lenders should make every effort to limit the potential for it to be changed or terminated.

One of the biggest risks when lending on a project secured by a ground lease is the borrower defaulting on the lease. If a ground lease is written heavily in favor of the lessor, this situation could lead to the lessor terminating it and leaving the lender with no recourse.

Luckily, there are ways for the lender to avoid this worst-case scenario.

Prior to executing the loan, the lender should require that the lessor provide them with written notice if the borrower defaults on their lease payments. In addition, the lease should give the lender the ability to correct the default themselves. By doing this, the lender will have the advanced notice and power necessary to keep the ground lease from being terminated, even if the borrower defaults.

Aside from being protected against a complete default, lenders should also require that the ground list limits or completely restricts the potential for future changes to the lease terms. If changes are to be made, the lender should be the party to approve those changes. Doing so will decrease the risk of a future change negatively impacting the lender.

4. See It From The Borrower’s Perspective

Lastly, it’s not enough for lenders to understand ground leases solely from their own perspective. To truly become proficient at closing deals with ground leases involved, lenders also need to see them through the eyes of the borrower.

For example, say a developer is planning to pursue a $100 million office project and wants to construct the building on prime parcel of land in a downtown area. The developer can either purchase the land for $10 million, or sign a ground lease with the landowner with a payment of $100,000 per year.

If the developer opts to purchase the land outright without using financing, they will need to pay $10 million in equity. This will reduce the amount of equity they have available to pursue the actual development, which is the ultimate goal of the investment. This scenario also assumes the land is available for purchase to begin with, which isn’t always the case.

Alternatively, the developer could sign a ground lease for the land, which would likely require no down payment and allow the developer to retain $10 million of equity to contribute towards the development of the office building. Not only does this scenario reduce the amount of equity the developer needs to raise, but it could also increase the percentage return on investment for the project since there will be less equity involved. In some situations, the developer could even receive additional financial benefit by deducting the ground lease payments from their tax obligations.

While this scenario is oversimplified, it’s a good example of how and why a ground lease makes sense to developers in some situations. Lenders who are able to understand their financial implications from the borrower’s perspective will be better equipped to make lending decisions when they are involved.

We hope this article gave you a good understanding of what a ground lease is and how CRE lenders should navigate them in their lending decisions. Though they may add an additional level of complexity, ground leases are becoming increasingly popular and could present lenders with additional lending opportunities.

If you’d like to learn more, check out how Finance Lobby’s online marketplace model for the CRE lending industry benefits real estate trends like these.

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Tax considerations for ground leases

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For investors looking for new opportunities, ground leases are catching on in New York City and beyond. A ground lease occurs when the property owner sells the land to an investor, then leases it back from the investor.

The transaction is documented in a ground lease, a document that usually lasts from 35 to 99 years. Often, during the time that the tenant is leasing the property, he or she may decide to build another structure on it; sometimes that entails razing an existing structure. Once the lease hits its expiration date, the tenant transfers the ownership of the improvements to the property owner.

Many types of property are ground-leased, including vacant land, industrial property, office buildings, multifamily residential properties and hotel properties. In New York City some co-ops are built on property that was ground-leased, allowing the owners to price the co-ops at very competitive prices. The co-op developers save some money by leasing the land, instead of buying it, and are able to pass this along to the residents. They also pass along the cost of paying for the ground lease, however, which contributes to monthly maintenance fees that may exceed those of other types of apartments.

Many property owners like the ground lease because it allows them to derive value from land they may not be using or are underusing.

For instance, some universities that own vacant land or own unused student housing have turned to ground leasing, creating a new revenue stream to fund campus programs and initiatives. Family businesses may opt for ground leases to keep a property in the family, even if they don’t have the funds or the desire to develop it. For some owners, ground leases can generate higher returns on a property than they would get from its appreciation over time.

Although ground leases can offer many advantages to investors, there are also tax considerations. The tenant must pay the property taxes when the property is subject to a ground lease.

It is important to get expert advice from knowledgeable commercial real estate professionals on how to take stock of a property for which the owner is considering ground leasing, what type of deal best meets the needs of the owner, and the level of control the owner will have over any construction on the property, among other issues. The owner will need legal protections in case the tenant does not take care of the property in the agreed-upon manner. Beyond this, the owner will need to develop a marketing strategy for the property that’s to be made available for ground leasing.

For insight,  Crain’s Content Studio  spoke with Jonathan Stein, a director at Goulston & Storrs. Stein provides tax advice for commercial and real estate transactions. Among his clients are real estate investment trusts, developers, institutional and family office investors, closely held enterprises, family businesses, fund sponsors, portfolio companies and lenders.

Stein focuses on complex tax matters involving joint ventures, cross-border and tax-exempt structuring, tax-free exchanges, transfer taxes, leasing and finance matters. He also represents investment fund sponsors and portfolio companies in both taxable and tax-free merger-and-acquisition transactions.

CRAIN’S: How do ground leases work and why are they becoming popular?

STEIN:  A new wave of ground lease investors is seeking to restructure the real estate capital stack by separating the ownership of the land under a commercial building from the building itself. In practice, the way this works is that an investor buys the land from the real estate owner or developer and then leases it back to the seller under a long-term ground lease. Because these ground leases can unlock additional liquidity and lower the cost of capital, they are very attractive for owners and developers.

CRAIN’S: What tax issues arise with a ground lease?

STEIN:  As with all things real estate, there are some important tax considerations at stake. Foremost, the parties must decide whether to treat the sale and leaseback of the land as a “true lease” for tax purposes. If the lease is respected as such, then the seller may have what is known as a “gain on sale.” This gain could be deferred by entering into a like-kind exchange. This is when property used for business or as an investment is exchanged for another similar property that is used for the same purposes.

If the tax cost of a sale is high and a like-kind exchange is not feasible, then it may be possible to treat a long-term lease as financing or a loan instead of a “true lease.” In this scenario, the form of the transaction as a ground lease is ignored for income tax purposes. Instead, the owner of the real estate is treated as if the “purchase price” it received for the land was a loan, and the payments of “rent” are payments of principal and interest on this loan. Whether a given lease can be treated as financing depends on the terms of the lease, and in particular how the option to buy back the land is structured.

CRAIN’S: What about depreciation?

STEIN:  Occasionally sale-leasebacks will include a purchase of the buildings and improvements, as well as the ground. In this circumstance the purchaser-landlord will be able to depreciate the building instead of the seller-tenant. This tax result is subject to negotiation, and seller-tenants are often able to keep the benefits of depreciation on the improvements. Because land is not depreciable, this issue does not arise for a true ground lease.

CRAIN’S: Are there transfer taxes?

STEIN:  This varies based on the jurisdiction. In New York the grant of a ground lease is usually subject to New York state transfer tax, either because the transaction contains a purchase option or because the lease term is longer than 49 years or both. New York City transfer taxes typically do not apply to a new ground lease because “rents” under the city’s Commercial Rent Occupancy tax are excluded from transfer tax. However, assignments of ground leases may be taxable in both New York state and New York City. With proper planning, it may be possible to avoid paying transfer tax twice, once on the sale and once on the leaseback.

CRAIN’S: Are there any other structuring considerations?

STEIN:  Leases should be analyzed to determine whether there is prepaid or deferred rent. If so, special tax accounting rules may apply so that the prepaid or deferred amounts are accrued ratably over the lease term.

Click here for a pdf of this piece

References:

https://assetsamerica.com/ground-lease/ 

https://www.us.jll.com/en/views/unlock-the-value-of-underutilized-land-with-a-ground-lease

https://www.reit.com/news/reit-magazine/september-october-2018/reinventing-ground-lease-concept

https://streeteasy.com/blog/what-is-a-land-lease-building-in-nyc/

https://www.skylineprp.com/resurgence-of-the-ground-lease

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Assignment of Lease

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What is an assignment of lease.

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Benjamin W.

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

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Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.

I'm a Washington-licensed lawyer specializing in trademark practice and with an extensive trademark education and academic background. I currently work with domestic and international businesses seeking trademark protection in the U.S. by conducting trademark searches, providing legal advice, submitting USPTO applications, and preparing responses to office actions. I'm passionate about trademark law and always looking forward to helping small and medium businesses promote their value by having a registered federal trademark. If you have questions or concerns about trademark/copyright/IP licensing and require legal advice, feel free to contact me and we can have a first chat.

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Mr. Pomeranz serves as the principal of Pomeranz Law PLLC, a boutique law firm representing clients across myriad industries and verticals. Before founding the firm, Mr. Pomeranz served as Senior Vice President, Legal & Compliance and General Counsel of Mortgage Connect, LP in 2017. Mr. Pomeranz also served as Counsel, Transactions for Altisource Portfolio Solutions S.A. (NASDAQ: ASPS) beginning in 2013, and was based in the company’s C-Suite in Luxembourg City, Luxembourg. Mr. Pomeranz began his career with Mainline Information Systems, Inc. as an in-house attorney.

Rinky S. Parwani began her career practicing law in Beverly Hills, California handling high profile complex litigation and entertainment law matters. Later, her practice turned transactional to Lake Tahoe, California with a focus on business startups, trademarks, real estate resort development and government law. After leaving California, she also served as in-house counsel for a major lending corporation headquartered in Des Moines, Iowa as well as a Senior Vice President of Compliance for a fortune 500 mortgage operation in Dallas, Texas prior to opening Parwani Law, P.A. in Tampa, Florida. She has represented various sophisticated individual, government and corporate clients and counseled in a variety of litigation and corporate matters throughout her career. Ms. Parwani also has prior experience with state and federal consumer lending laws for unsecured credit cards, revolving credit, secured loans, retail credit, sales finance and mortgage loans. She also has served as a special magistrate and legal counsel for numerous Florida County Value Adjustment Boards. Her practice varies significantly from unique federal and state litigation cases to transactional matters. Born and raised in Des Moines, Iowa, Ms. Parwani worked in private accounting for several years prior to law school. Her background includes a Certified Public Accountant (CPA) certificate from Iowa (currently the license is inactive) and a Certified Management Accountant (CMA) designation (currently the designation is inactive). Ms. Parwani or the firm is currently a member of the following organizations: Hillsborough County Bar Association, American Bar Association, Tampa Bay Bankruptcy Bar Association, National Association of Consumer Bankruptcy Attorneys, and the American Immigration Lawyers Association. She is a Fellow of the American Bar Association. Ms. Parwani is a frequent volunteer for Fox Channel 13 Tampa Bay Ask-A-Lawyer. She has published an article entitled "Advising Your Client in Foreclosure" in the Stetson Law Review, Volume 41, No. 3, Spring 2012 Foreclosure Symposium Edition. She is a frequent continuing legal education speaker and has also taught bankruptcy seminars for the American Bar Association and Amstar Litigation. She was commissioned by the Governor of Kentucky as a Kentucky Colonel. In addition, she teaches Immigration Law, Bankruptcy Law and Legal Research and Writing as an adjunct faculty instructor at the Hillsborough Community College Ybor campus in the paralegal studies program.

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Contract to lease land from a church.

I’m planning on leasing land from a church. Putting a gym on the property. And leasing it back to the school.

Ok; first step is that you will need a leasing contract with the church. Ask them to prepare one for you so you would just need an attorney to review the agreement and that should cost less than if you had to be the party to pay a lawyer to draft it from scratch. You need to ensure that the purpose of the lease is clearly stated - that you plan to put a gym on the land so that there are no issues if the church leadership changes. Step 2 - you will need a lease agreement with the school that your leasing it do (hopefully one that is similar to the original one your received from the church). Again, please ensure that all the terms that you discuss and agree to are in the document; including length of time, price and how to resolve disputes if you have one. I hope this is helpful. If you would like me to assist you further, you can contact me on Contracts Counsel and we can discuss a fee for my services. Regards, Donya Ramsay (Gordon)

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Best Practices: Considerations for SBA Loans Financing Improvements on Leased Land (Ground Leases)

• November 3, 2021
• Kristen Dickey

When financing improvements on leased land, it is important to consider the ways in which an SBA lender can adequately secure its loan.  The purpose of this article is to highlight the analysis the lender should complete and documentation the lender should obtain to remain in compliance with SBA rules and requirements when financing improvements for a borrower on leased land, generally known as a “ground lease.”

A ground lease is a type of lease wherein  a tenant leases raw land from its owner to develop and improve using its own or financed funds.  During the term of the ground lease, the improvements constructed by the tenant remain the property of the tenant, but once the term of the ground lease expires, the improvements on the land become the property of the landlord, i.e., the owner of the land.  A ground lease is often called a “land lease” because the landlord leases only the underlying land to the tenant upon which the tenant constructs the building from which it will operate.  This type of lease structure is beneficial to both the tenant and the landlord.  The tenant is able to obtain property in a prime location which may not be financially feasible to purchase, and the landlord’s property value typically increases once the tenant develops it.  The Landlord stands to sell the property for a substantial profit once the term of the ground lease expires.  Typically, the tenant assumes responsibility for most expenses of the improvements, including construction, repairs, renovations, improvements, taxes, insurance, and any financing costs associated with the property.  For this reason, the ground lease term also tends to be much longer than a typical lease given the additional costs involved with development of the improvements on the property.

SBA loans used for financing improvements on leased land are secured with a lien on the borrower’s leasehold interest in the land by means of a leasehold mortgage or deed of trust.  Lenders should consider obtaining title insurance to insure the lender’s lien position on the borrower’s leasehold interest.  A lender taking a leasehold interest in the land as security for a loan, would also be required to: (i) follow the appraisal requirements for commercial real estate collateral set forth in the SOP; and (ii) obtain an environmental investigation on the property, the type and depth of which would be determined by the risk of contamination associated with the property and prudent lending practices and internal lending policy of the lender.

The SBA requires very specific information to be included in the ground lease itself in addition to the standard landlord waiver and collateral assignment of lease.  In particular, the SOP requires the Lender obtain the landlord’s written consent to the leasehold mortgage or deed of trust and a collateral assignment of the ground lease.  If the ground lease has already been executed and does not contain the following provisions: (i) tenant’s right to encumber leasehold estate; (ii) no modification or cancellation of lease without lender’s or assignee’s approval; and (iii) lender’s or assignee’s right to: (a) acquire the leasehold at foreclosure sale or by assignment and right to reassign the leasehold estate (along with right to exercise any options) by lender or successors; landlord may not unreasonably withhold, condition, or delay the reassignment; (b) sublease; (c) share in hazard insurance proceeds resulting from damage to improvements; (d) share in condemnation proceeds; and (e) SBA lender’s or assignee’s rights upon default of the tenant or termination (including notice, extended time to cure (at least 60 days), time allotted for foreclosure and sale, and procedures for non-monetary defaults), the lender should consider obtaining an agreement of landlord encompassing all the foregoing requirements.

For assistance with SBA lender considerations and compliance for transactions involving a ground lease, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.

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Top Ten Basic Terms for a Financeable Ground Lease

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By nancy little , partner, mcguirewoods llp, introduction.

Whether you are a borrower or a lender, if you are considering a loan supported by a ground lease, you need to be sure the ground lease is "financeable." A financeable ground lease includes either (a) "subordination" of the landlord's fee interest in the land or (b) provisions to protect the lender (as leasehold mortgagee) from certain risks that could arise as a result of the borrower having a leasehold interest in the land instead of fee ownership. The so-called "subordinated fee" referred to in clause (a), above, is less common and essentially allows a fee mortgage. According, the top ten considerations below focus on protections needed in a ground lease in order for a leasehold mortgagee to consider the ground lease financeable.

1. Avoid a Sublease.

The lender will prefer (or may require) that the ground lease not be a sublease. A sublease would require additional review associated with the prime lease and can create additional complexities. The lender may impose requirements for additional security and/or protections and assurances if the ground lease is a sublease.

2. Fixed Rent.

The lender will want to be able to quantify its risk if it should face taking back the property in foreclosure. Should it step into the shoes of the borrower as lessee under the ground lease, it will want to know that the rent is fixed or at least predictable, preferably with limited or no escalations.

3. Long Term.

Leasehold lenders prefer that the term of the ground lease be significantly longer than the term of the loan because the lender will want a sufficiently long period of time after foreclosure to try to recover its investment from the property. Accordingly, ground leases with a relatively short remaining term can be problematic.

4. Right to Exercise Renewal and Purchase Options.

Consistent with item 3 above, the lender will want the right to exercise renewal options to be sure that the term will be sufficiently long. The lender will also want the right to exercise any renewal options even if the borrower/ground lessee is in default or has failed to exercise the renewal options. The same applies to any purchase options, which the lender will also want the right to exercise in case it determines that its best course of action is to buy out the fee owner's/ground lessor's interest in the land.

5. Broad Use Clause.

The lender will want broad rights to use the property, without undue restrictions. After foreclosure, the lender may need to change the use of the property to facilitate the sale, lease or other disposition of the property or to enhance revenue. The lender will not want to have to seek consent of the ground lessor for a change in use.

6. No Merger Clause.

The ground lease should include a "no merger" provision that the estates and interests of the ground lessor and the ground lessee do not "merge" if the ground lessee acquires the ground lessor's fee interest in the property. A merger issue could arise, for example, if the ground lessee exercises an option to purchase that may have been granted under the ground lease. The "no merger" clause is intended to prevent such a merger from wiping out the lender's leasehold mortgage that could occur by operation of law if the leasehold interest upon which the mortgage is based disappears if the leasehold estate and fee estate merge.

7. Limited Liability of Lender.

From the lender's perspective, the ground lease should provide that, in the event of foreclosure, the leasehold lender will only have liability during its period of ownership and will not have continuing liability after its sale and/or assignment of its interest in the property.

8. Few Personal Covenants.

The ground lease should contain few, if any, "personal" covenants, that is, provisions that are personal to, or can only be performed by, the borrower/ground lessee. Such covenants, if breached, generally are not capable of cure by the leasehold lender before or after foreclosure and could result in a non-curable default and the risk of termination of the ground lease.

9. Right to Mortgage and Waiver of Landlord's Lien.

The ground lease should include an express right for the ground lessee to enter into a leasehold mortgage, pledging as security its ground lease interest in the land as well as its interest in the improvements. The lender will also want to see a waiver of any landlord's lien that may otherwise be available to the ground lessor under applicable law.

10. Leasehold Mortgage to Control Use of Proceeds.

The leasehold lender will require that the leasehold mortgage controls the use of proceeds of casualty and condemnation, as opposed to any contrary provision in the ground lease. The lender has an interest in the use of such proceeds and whether they are used for restoration or rebuilding or are applied to the loan balance, and the lender will want such proceeds applied as provided in the mortgage. With respect to condemnation, the ground lessor does have a residual interest in the land so the ground lease may provide that an award for a temporary taking is payable to the ground lessee for the temporary loss of use of the property. For a partial taking, the award may be applied to rebuilding or restoration, and for a total taking, the award may be applied first to payment of the loan and then equitably distributed to the ground lessee and ground lessor.

The foregoing is a brief overview of how certain basic terms of a ground lease are viewed from the lender's perspective for a financeable ground lease. The ground lessee would be well served by negotiating for these provisions upfront and not waiting for a leasehold lender to raise these points at the time of loan negotiation. There are other important features of a financeable ground lease, such as cure rights, waivers of certain defaults and no termination of the ground lease pending foreclosure to name a few, that are critical as well. These provisions may be the subject of future articles.

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