commit a7e6f6a6a72fc92b03fe325c8c2d5868b737cf4b Author: steffenhuddles Date: Wed Aug 20 07:48:34 2025 +0800 Add Ground Lease Risks In Municipal Bond Projects diff --git a/Ground-Lease-Risks-In-Municipal-Bond-Projects.md b/Ground-Lease-Risks-In-Municipal-Bond-Projects.md new file mode 100644 index 0000000..4146f7f --- /dev/null +++ b/Ground-Lease-Risks-In-Municipal-Bond-Projects.md @@ -0,0 +1,18 @@ +
The majority of the tasks involve tax-exempt lessor structures. Since government entities and not-for-profit organizations are exempt from real residential or commercial property taxes in many jurisdictions, a ground lease between such entities and a borrower-sponsor offers a project the opportunity to either be exempt from residential or [commercial property](https://realtor92.pk) taxes or based on a payment-in-lieu of taxes arrangement, both of which can provide significant cost savings over the life of a task.
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In higher education, universities typically utilize conduit financed ground lease structures to develop trainee housing tasks. These projects consist of a ground lease between a university, as property owner, and the borrower-sponsor, as occupant. The university concurs to the ground lease due to the fact that, since the borrower-sponsor is accountable for payment of the bonds and the mortgage is on the leasehold, the university can build a project on school without sustaining debt and keep the job free of charge once the ground lease is ended. During the term of the ground lease, the arrangements of the ground lease supplies a means for the university to manage or monitor the project and get an annual ground lease rent.
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In other markets, the issuer typically owns the land and ground rents the arrive at which the task is to be built to the borrower-sponsor, who constructs the job and subleases it back to the provider. Such a job gets approved for a real residential or commercial property tax exemption since it is owned by a government entity, and considering that the government entity is likewise renter under the sublease, the job receives sales tax exemptions on materials throughout building. The provider, as occupant under the sublease, is accountable for payment of the bonds, while the borrower-sponsor establishes and operates the project pursuant to terms of arrangements with the company. The borrower-sponsor normally has an opportunity to buy the land and task when the bonds are paid.
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These structures present special dangers to bond buyers. The bonds are usually protected by mortgages on the leasehold and/or subleasehold estates. Bondholders ought to be conscious of the rights of celebrations to end the ground lease or interfere with their ability to work out treatments. If the ground lease is terminated or the trustee can not seize the job, the matching lien on the physical job is extinguished and the security plan has no worth.
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With that in mind, bondholders need to seek the following defenses in any ground lease that is part of a community bond financing:
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Term - the term of the ground lease must be at least 5 years beyond the maturity date of the bonds, and shareholders ought to promote more if at all possible. The additional 5 or more years enables a workout and extension of the term of the bonds in case it is required to enable the job to money flow to cover operating costs and financial obligation service. If the bonds on a task have a bullet maturity, the term of the ground lease must be at least double the regard to the bonds to permit for a refunding of the developing bonds.
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Authorization - the ground lease should clearly authorize the borrower-sponsor to incur a mortgage on the ground lease or else a court would consider the lien on the leasehold estate void.
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Transfer and Assignment - the ground lease need to be assignable by the trustee without limitations. Failure to include such arrangements might avoid a mortgagee from offering or [transferring](https://ethio-realestate.com) the leasehold estate (by sale or otherwise) upon foreclosure or the execution of an assignment-in-lieu of foreclosure. It is very important for the arrangements to enable the trustee to designate another entity to take position in lieu of the trustee given that the funding structure might count on the status of borrower-sponsor to preserve the tax-exempt status of the bonds and/or provide other tax advantages. Additionally, such designee needs to be entitled to a brand-new lease to assist in the restructuring of the task upon foreclosure or assignment-in-lieu of foreclosure.
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Notice and Opportunity to Cure - any notification of default by the renter under the ground lease should be offered to the trustee, and the trustee should have an opportunity to treatment of at least 30 days. An uncured event of default of tenant under the ground lease generally approves the lessor the right to terminate the ground lease, which would get rid of the trustee's collateral. A notice and chance to treat allows the trustee to preserve its collateral and later seek reimbursement for such expenditures of borrower under the leasehold mortgage, trust indenture or other bond documents.
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New Lease - if the ground lease is ended for any reason, like termination upon default, or is rejected in personal bankruptcy, the trustee needs to have the chance to [participate](https://realtor92.pk) in a new lease on the exact same terms.
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No Modification - the ground lease ought to not be permitted to be modified without the approval of mortgagee, or else the property manager and debtor could customize mortgagee rights and treatments without mortgagee's understanding or authorization.
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In our experience representing shareholders, the majority of the ground rents we have actually reviewed have actually included the foregoing provisions. As we have come across more complex financings, we have seen the following severe problems:
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Cross-Default - the ground lease and sublease need to not cross-default with the trust indenture, loan arrangement or any other bond document (Example: "A default under the Trust Indenture is a default under this Lease ..."). Any occasion of default under the bond documents need to offer the trustee the opportunity to [exercise](https://etisangproperties.com) treatments, not provide the landlord the opportunity to remove the leasehold estate and, as an outcome, the security, unless the trustee cures borrower-sponsor's default.
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Third Party Beneficiary - the ground lease and sublease ought to recognize the trustee and any follower trustee as third-party beneficiaries. This can be done by including a provision that designates any leasehold mortgagee as a third-party beneficiary that can implement the arrangement versus the proprietor and the renter. Leasehold mortgagees are not celebrations to the ground lease, so a third-party beneficiary classification is needed to implement mortgagee protections in the [ground lease](https://realestate.zoeay.com) and sublease versus the property owner and renter in court. Additionally, if success of the job depends on the property owner and borrower-sponsor conference certain requirements or offering certain services under the ground lease or sublease, the third-party recipient classification is needed for the leasehold mortgagee to impose those provisions against the parties if they stop working to satisfy expectations.
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[Borrower](https://www.visualizaweb.com.br) Notices and Consents - if the task is a lease-sublease structure where the borrower-sponsor is the occupant under the ground lease and the property owner under the sublease, the borrower-sponsor needs to have no authorization rights on any mortgagee matters under the ground lease or the sublease. The borrower-sponsor as ground lease renter and sublease property owner is more of a passthrough entity for the job until the bonds are paid, while the borrower-sponsor as designer and manager is a true party-in-interest to the project. Just as designers and supervisors normally do not have consent rights to modifications of the collateral, the borrower-sponsor needs to not have those authorization rights to the mortgage in the project. It grants the [borrower-sponsor severe](https://www.propndealsgoa.com) take advantage of in a workout against bondholders. If the borrower-sponsor has permission rights over mortgages in the sublease, for instance, it might prevent the execution of a mortgage on the subleasehold estate over unsettled management and developer costs that are subordinate to financial obligation service.
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Shared Parcels - the ground lease and sublease need to be on their own partitioned plot, not part of a larger charge estate parcel. When ground lease tasks become part of a bigger charge estate parcel, the project is at risk of unrelated actions and charges on the charge estate. For circumstances, if a landlord that has actually part of the fee residential or commercial [property](https://test1.coraworld.com) to a task, funded by bonds and secured by a leasehold mortgage, chooses to establish the remainder of the residential or commercial property on the fee estate and secure it by a fee mortgage, a foreclosure of that charge mortgage would snuff out the leasehold and subleasehold estates. Similarly, if the property owner's charge project sustains taxes, energy charges, homeowners association costs or other costs that have the prospective to end up being "very liens" remarkable to the leasehold estate, a foreclosure of those liens would terminate the ground lease and sublease. If the ground lease and sublease need to become part of a bigger charge parcel, the ground lease and sublease must (a) need that any mortgage or lien put on the charge interest is secondary to the ground lease, (b) require that the [landlord](https://hooverealestate.uproweb.com) without delay pays any charges or costs that risks the leaseholds, and (c) permit the [borrower-sponsor](https://homes.lc) and the leasehold mortgagee to treat charges on the fee estate and seek compensation from the landlord.
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Multiple Mortgagees - The ground lease must recognize the potential for several mortgagees and prioritize the most senior mortgagee. We have experienced tasks with several [mortgagees](https://properties.jamtoursafrica.com) where the mortgagees do not have an intercreditor arrangement. In those cases, either the subordinate mortgagees are secondary to the senior mortgagees based upon time of recording and the other bond documents, or the subordinate mortgagees have a springing security interest that connects once the senior bonds are paid off. Because there is no intercreditor contract, the deal is silent regarding negotiation treatments upon an occasion of default. Subordinate mortgagees, who typically have a closer relationship with the borrower-sponsor and misaligned interest with the senior mortgagees, frequently take the reins negotiating with property owners in an exercise without informing or seeking advice from the senior mortgagees. Either the ground lease must clarify that the property manager will prioritize the most senior protected mortgagee in negotiation and disagreement resolution, and/or an intercreditor contract with clear standards should be taped on the task.
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Before investing in a ground lease project, bondholders need to totally understand the job and its risks. While reviewing the main declaration and [engaging](https://www.bgrealtylv.com) with the underwriter, this client alert ought to work as a detailed list of concerns that should be attended to. In the context of a limited offering, perspective buyers of the bonds have take advantage of to request our recommended modifications to the ground lease. In those transactions, a lot of property managers are related celebrations that straight gain from the conduit [funded project](https://www.amlakbanoo.com). It would usually benefit landlords for the jobs to be successful, and a failure to work out in great faith or a termination of the ground lease with a leasehold mortgage would negatively impact their credibility and score in the bond market. If any of these protections are not included when the bonds are issued, it is crucial to get them in a workout as a condition for forbearance or refinancing.
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