513 7636751 wwwfraternallawcom National Panhellenic Conference 2015 Annual Meeting October 2225 2015 Dallas TX Ground Leases and Financing October 22 2015 AGENDA Deal Risks and Deal Structures ID: 723197
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Slide1
Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.comSlide2
National Panhellenic Conference
2015
Annual Meeting
October 22-25, 2015Dallas, TXSlide3
Ground Leases and Financing
October 22, 2015Slide4
AGENDA
Deal Risks and Deal Structures
Elements of Ground Lease
Why a Ground Lease and Perspectives
Is My Ground Lease Financeable?Slide5
Inherent
Deal Risks in Greek
Housing
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 exitSlide6
Common Deal Structures
Owned.
Leased from private landlord.
Leased from host institution.
Ground lease from host institution.Slide7
Common Deal Structures
OWNED
Simplest structure – deed/possible construction contract.
Flexibility – hold, sell, finance.
Possible appreciation – upside potential.
Costly – land and improvement price, acquisition costs, construction.
Tied to particular space on campus – location choice critical.
Possible depreciation – downside risk.Slide8
Common Deal Structures
LEASED FROM PRIVATE LANDLORD
Simple to document (relatively) – standard lease concerns.
Exception – Build to suit
Flexibility – only committed to term.
Minimal investment to secure location.
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.Slide9
Common Deal Structures
LEASED FROM HOST INSTITUTION
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.Slide10
Common Deal Structures
GROUND LEASED FROM HOST INSTITUTION
Usually long term akin to ownership.
Flexibility possible – sell, finance.
Potential return on investment.
Term vital – only leasing ground!
Difficult to document - complex.
What happens to improvements if lease terminates early?
Adhesive contract – exist at pleasure of university.Slide11
Definition
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
9
th
Ed.Slide12
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 considerationSlide13
Letters of Intent
It is. . .
not the law that an
agreement
t
o 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.Slide14
Elements of Ground Lease
A writing. . . signed . . .
Lessor/Lessee
Premises –
GROUND!
Rent/Additional Rent
TermSlide15
Why A Ground Lease
Landlord Perspective
Retain ownershi
p
.
Avoid development risk.
Facilitates development of LL RE.
Allows LL to control development.
LL may not have right to sell.
No investment by LL!
Slide16
Why A Ground Lease
Tenant Perspective
Conserve resources.
Owner unwilling to sell.
Not typically preferred over fee.
More difficult to finance.
More difficult to sell.
Slide17
Why A Ground Lease
Lender Perspective
Collateral at risk – tenant default.
Ratings standards - term.
More difficult to document.
Not typically preferred over fee.
More difficult to foreclose/sell.
Slide18
Greek Villages and New ConstructionSlide19
New Construction
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?Slide20
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
.Slide21
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.Slide22
Is My Ground Lease Financeable?
Term
Revenue
Ruling 60-367, 1960-2 C.B. 73
PLR-110977-99College’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.Slide23
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.Slide24
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. Slide25
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
Slide26
Is My Ground Lease Financeable?
Use Provision
"
any lawful purpose. . . "
Restrictions limit avenues available to recover value from collateralA narrow use restriction can severely impact the financeability of a ground lease.Slide27
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. Slide28
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
Slide29
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)
Slide30
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
Slide31
http://
fraternallaw.com/wp-content/uploads/2015/07/FEA-2015-Annual-Meeting-Ground-LeasesFINAL.pptxSlide32
Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.com