Why your ground lease should be financeable.

• Author: DiGeronimo, Michael E.
• Position: Real estate

Leasing raw or unimproved land affords expanding or relocating companies the ability to improve their place of business. Whether you intend to build a crystal palace, a high-tech factory or a retro restaurant like L.A.'s former Brown Derby (which was as famous for its hat-like exterior as it was for its original chopped salad), you may lose your ability to finance your facility's improvements if your lease is improperly drafted.

Companies often unwittingly sacrifice their ability to make future improvements to their property by neglecting to make their ground lease financeable. A financeable ground lease is one that may be readily used by a tenant to secure needed or desired financing. Such financing is typically secured by a leasehold deed of trust or mortgage.

The provisions needed to make a ground lease financeable are often overlooked, particularly if the tenant doesn't need financing to construct its initial leasehold improvements. When such initial financing is needed, the lender will usually insist that the lease contain certain clauses, which serve to protect the lender's interest. If your company doesn't require a loan or other financing to construct its initial leasehold improvements, you should nonetheless make every effort to negotiate a financeable ground lease in order to give you sufficient flexibility to use its leasehold interest and leasehold improvements to obtain financing at a later date.

Lenders have a long list of requirements before approving any financing--especially when someone else owns the land. For example, an additional time period for a lender to cure a tenant's default under a lease may be a condition of a proposed loan. Perhaps it's a document, such as an estoppel certificate, that needs to be signed by the landlord before the desired loan can be funded. Both situations, however, can be problematic if such clauses were not included in the subject lease or leases, when executed.

Landlords may, and often will, simply ignore or shrug off any requests or obligations they are not legally compelled to undertake by the existing terms of their lease or leases. In negotiating leases, people sometimes just make mistakes and think that the smallest words in the lease don't have significant impact or meaning--but for lenders, virtually every word matters. Attempting to fix such problems after they have occurred is almost always more difficult than negotiating a lender-friendly lease in the first place.

Count on lenders...