Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.com
Fraternity Executives
Association
2015 Annual Meeting
July 9, 2015
Scottsdale, AZ
Ground Leases and
Financing
July 9, 2015
AGENDA
• Deal Risks and Deal Structures
• Elements of Ground Lease
• Why a Ground Lease and Perspectives
• Is My Ground Lease Financeable?
Inherent Deal Risks in Greek Housing
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Cost to get into house (purchase or lease)
Amortization and operational costs (student cost)
Location and amenities – competitive over time
Legal risk – liability, insurance and indemnification
Corporate risk – properly formed and insulated from
personal liability
Tax risk – properly formed and operating as exempt
Exit strategy and cost to exit
Common Deal Structures
• Owned.
• Leased from private landlord.
• Leased from host institution.
• Ground lease from host institution.
Common Deal Structures
OWNED
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Simplest structure – deed/possible construction contract.
Flexibility – hold, sell, finance.
Possible appreciation – upside potential.
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Costly – land and improvement price, acquisition costs,
construction.
Tied to particular space on campus – location choice
critical.
Possible depreciation – downside risk.
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Common Deal Structures
LEASED FROM PRIVATE LANDLORD
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Simple to document (relatively) – standard lease
concerns.
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Exception – Build to suit
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Flexibility – only committed to term.
Minimal investment to secure location.
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No long term security – landlord bound only to term.
High risk if not properly documented (compliance with
laws, indemnification, tenant improvements).
No return on investment.
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Common Deal Structures
LEASED FROM HOST INSTITUTION
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Easy implementation – no zoning, land use,
university objections.
Flexibility – Only committed to term.
If drafted advantageously, minimal investment for
location.
No long term security – landlord bound only to term.
Adhesive contracts – particularly on large projects.
No return on investment.
Common Deal Structures
GROUND LEASED FROM HOST INSTITUTION
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Usually long term akin to ownership.
Flexibility possible – sell, finance.
Potential return on investment.
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Term vital – only leasing ground!
Difficult to document - complex.
What happens to improvements if lease terminates
early?
Adhesive contract – exist at pleasure of university.
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Defintion of Ground Lease
ground lease. (1840) A long-term (usually 99-year)
lease of land only * Such a lease typically involves
commercial property and any improvements built by
lessee usually revert to the lessor.
Black’s Law Dictionary
9th Ed.
Elements of a Contract
• An offer and acceptance
• Contractual capacity
• Consideration (the bargained for legal
benefit and/or detriment)
• Manifestation of mutual assent
• Legality of object and of consideration
Letters of Intent
It is. . . not the law that an agreement
to make an agreement is per se
unenforceable.
The enforceability of such
an agreement depends rather on
whether the parties have manifested an intention to
be bound by its terms and whether these intentions
are sufficiently definite to be specifically enforced.
See, generally, Restatement of Contracts 2d 75,
Section 26; 1 Corbin on Contracts 97, Section 30.
Elements of Ground Lease
• A writing. . . signed . . .
• Lessor/Lessee
• Premises – GROUND!
• Rent/Additional Rent
• Term
Why A Ground Lease
Landlord Perspective
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Retain ownership.
Avoid development risk.
Facilitates development of LL RE.
Allows LL to control development.
LL may not have right to sell.
No investment by LL!
Why A Ground Lease
Tenant Perspective
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Conserve resources.
Owner unwilling to sell.
Not typically preferred over fee.
More difficult to finance.
More difficult to sell.
Why A Ground Lease
Lender Perspective
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Collateral at risk – tenant default.
Ratings standards - term.
More difficult to document.
Not typically preferred over fee.
More difficult to foreclose/sell.
Greek Villages and New Construction
New Construction
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Cost - $3 million to $14 million
Financing
Cost to students
Location – Is this sustainable?
What happens if the chapter fails?
What entity actually owns the improvements?
• House corp.?
• Bank? Bondholders?
• University?
Is My Ground Lease Financeable?
Right to Mortgage, Assign or Sublease
Explicit right to mortgage the leasehold?
Explicit right to assign lease or sublease the
premises?
A leasehold that cannot be alienated without
consent is of very little value to a lender.
Is My Ground Lease Financeable?
Term
Must extend beyond loan maturity….
Must be long enough to recover loan on default prior to
maturity.
A financeable ground lease often 50 to 99 years.
At least 10 years beyond the final maturity date of the
loan.
Is My Ground Lease Financeable?
Term
• Revenue Ruling 60-367, 1960-2 C.B. 73
• PLR-110977-99
• College’s right to terminate the lease at any
time upon giving eighteen months notice
causes the leases to be substantially similar
to the short-term leases considered in Rev.
Rul. 60-367.
Is My Ground Lease Financeable?
Mortgage Priority
Leasehold mortgage should be superior to any
mortgages on the property.
Ground lease should prohibit the landlord from
granting mortgage on property
The lease should require landlord to obtain a
subordination agreement or SNDA from any
existing mortgage holder.
Is My Ground Lease Financeable?
Default and Rights to Cure
Lender needs ability to cure default by tenant
“Step-in and step-out” rights
Ground lease should require that landlord provide
lender copies of any notices
Ground lease should provide that no notice by landlord
to tenant is valid if not also given to lender.
Is My Ground Lease Financeable?
“Pick-Up” Lease
Lender may require landlord to enter new lease
with lender if ground lease terminated
Why not lender cure rights alone?
Requires lender to cure defaults
Bankruptcy
Is My Ground Lease Financeable?
• Use Provision
• "any lawful purpose. . . "
• Restrictions limit avenues available to
recover value from collateral
• A narrow use restriction can severely
impact the financeability of a ground
lease.
Is My Ground Lease Financeable?
Renewal and Purchase Options
Lender will want right to exercise renewal options . . .
even if the borrower/ground lessee is in default
or has failed to exercise the renewal options.
Same applies to purchase options
Lender may decide to go ahead and buy out
owner.
Is My Ground Lease Financeable?
Insurance and Insurance Proceeds
Lender should be additional insured on casualty policy
Policy and lease should provide that proceeds payable to lender
Lease should not allow landlord or tenant right to terminate the
lease except with the consent of the lender
Lender goal to make sure that either
(i) improvements rebuilt or
(ii) loan paid
Is My Ground Lease Financeable?
Termination Rights
The fewer the better for financing purposes
Ideally lease would prohibit termination without consent of
lender
Lease should at least require landlord notice if termination
possible or tenant fails to exercise renewal option
Ground lease should prohibit landlord from accepting
surrender of lease (or even agreeing to amendments)
Is My Ground Lease Financeable?
“Nuts and Bolts”
Lease must allow for recording of at least a
memorandum of lease
Lease should allow each party to request
estoppel certificates
Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.com