It is a good idea for developers to be able to agree to financing if a ground lease prohibits them from financing. Getty Images
A ground lease is a long-term agreement between a property owner and a tenant developer. This ground lease can give the tenant great flexibility, but it also limits that flexibility in meaningful ways.
The ground lease may state that the tenant can get a leasehold mortgage, which is a mortgage secured by the tenants property interest. However, this only applies if the lender, as per a list of criteria, is an institution. The tenant will have to find financing elsewhere if the lender proposed doesn't fall within one of these categories.
A separate restriction might be that the tenant's loan cannot exceed 75% the value of the tenants' leasehold estate.
Consider the following facts, based on actual transactions. The tenant is looking for financing from a reliable, high-quality, strong lender who doesn't fall within one of the categories. To get the best terms for financing, the tenant will sign a mortgage that not only encumbers the leasehold estate, but also a few other properties. This property's value will be 75% more than the loan and mortgage amounts.
This would be against the lease. However, the property owner would be happy for the tenant to continue. The property owner does not intend to use strict enforcement to hold the tenant hostage. This is not the owners business model. The developer would be happy to get the financing it needs from the lender it chooses. The ground lease restrictions that tie tenants' hands would be waived by the property owner.
The problem is that the mortgage has been signed by the property owner. According to the mortgage, the owner cannot waive any terms in the ground lease without the consent of the lender. The ground lease also states the same thing. The ground lease even states that any waiver by an owner without consent from the lender is completely ineffective.
What can an owner and tenant do for tenants' requests?
The owner could ask the lender to agree to the waivers he or she wants. First, the owner must determine who to contact at the lender to do this. It isn't always simple. The owner may discover that the request needs to be sent to another person after connecting with the individual. If the loan is held by a securitization trust, the property owner will have to deal with a servicer. This is a separate entity that is brain-dead. If the owner is fortunate enough to meet someone intelligent, they will need to ask for additional information, documentation and a fee. Fourth, the committee will only have a few questions after that meeting and will need to go through all submissions again.
The property owner may not wish to go through that process. The tenant will have to find a new way to get and structure financing.
One small change to the ground lease's wording could have made a big difference. The lease could have stated that the owner must consent to the tenant borrowing from any lender other than an institution. The lease could also have stated that the tenant cannot borrow more than 75% the value of the leasehold.
If the terms of the ground lease allowed the owner to consent to such matters that are not prohibited by law, the lender would not need to waive the lease to accommodate the tenant. The owner would instead administer the ground lease according to its terms, which include the clause allowing the owner consent to certain matters. The tenant could request consent from the owner for its lender and loan structure. The lender would not have to waive anything for the property owner. The tenant could continue its financial life happily.
The mortgage on the property might prevent the owner from giving consent to the ground lease without the lender's consent. This is less likely than having the mortgage ban any waiver of ground lease. If the mortgage prohibits the owner from giving consents, it would likely only apply to important consents. This concept could be formulated in many ways. If the lease allowed for consents from landlords, it is possible for the owner to give that consent without the lender.
Ground leases can be either prohibitive or permissive. Even though it sounds very different, the second option allows for much greater flexibility.
