Public Private Partnerships…What are They Good For?

By Duke Dennis Over its 25-year operating history, Metropolitan Capital Advisors (MCA) has worked on numerous Public Private Partnership (PPP) transaction financings. PPPs have increasingly Read more

The Power of RECA (Real Estate Capital Alliance)

By: Scott Lynn and Andrew Hanzl Metropolitan Capital Advisors (“MCA”) is a member of the Real Estate Capital Alliance ("RECA"), a professional association of 18 Read more

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and Read more

Private Lenders: Filling the Void

by Roger Wyche There will be approximately $96 billion of CMBS loan expirations during 2017. CMBS lenders, therefore, have been counting on refinancing  Borrowers to Read more

A Bridge (Loan) to Everywhere

By Charley Babb Do you remember John McCain’s famous “Bridge to Nowhere” speech from 2005? As the Arizona Senator, and then later as the Republican Read more

Limited Service Hotels are, well…limited!

By Todd McNeill In recent times, the Limited Service Hotel sector’s reputation has steadily declined in the eyes of the finance industry. Once the darling Read more

TrumpCare and the Effect on Healthcare Commercial Real Estate Market

By Kevan McCormack Since Donald Trump has taken office as President of the United States, he has been very busy “making good” on his campaign Read more

What is the TRUMP Effect on Commercial Real Estate? 4 Key Points

— By Sunny Sajnani There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. Read more

Whither CRE Construction Lending?

By: Justin Laub The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: Read more

The Good, the Bad, the Texas High-Speed Rail Line

By Duke Dennis Brady Redwine of Texas Central Partners (TCP) recently addressed a group of Texas A&M real estate professionals about the high-speed rail line Read more

UT Ranked #1 in Commercial Real Estate Yardage

-By Scott Lynn Every fall season, the University of Texas at Austin McCombs Real Estate Finance & Investment Center (REFIC) sponsors the National Real Estate Read more

2017: Not a Forecast (Just Some Thoughts to Ponder) for the CRE Market

By Brandon Wilhite Accurately forecasting the commercial real estate market’s performance is a nearly impossible task. There are far too many variables to assess and Read more

What is PACE Financing?

By Andrew Hanzl Global warming is now a widely accepted concern. As real estate professionals, what role can we play to ensure environmental sustainability? One Read more

Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently Read more

Risk Retention in CMBS Starting to “Sink” in

By Todd McNeill The early signals of Risk Retention are reverberating through the commercial real estate capital markets.  Several conduit shops, including MC Five Mile Read more

Risk Retention, Risky Business?

By Scott Lynn Basel III, HVCRE…all these new lending regulations that mean lenders are loaning me less and charging me more. Good grief!!! And now, Read more

It’s Senior Living Not Senior Dying

By Kevan McCormack Everything in life and real estate evolves.  Static retail shopping centers evolved into vibrant entertainment venues where a family could spend an Read more

Metropolitan Capital Advisors Arranges $5,512,000 Acquisition Loan For A 9.77- Acre Lot In Frisco

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a land acquisition loan for a 9.77-acre tract located in Frisco, Texas at the northeast corner of Read more

Metropolitan Capital Advisors Arranges A $4,700,000 Construction Loan For UC Health Emergency Room (Arvada)

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a $4,700,000 construction loan for UC Health Emergency Room, located in Arvada, Colorado. The 0.69-acre site is Read more

Ground Leases-Friend or Foe?

On the surface, a ground lease seems like a simple concept: a landowner grants permission for a tenant to use their land in exchange Read more

What Do Baby Boomers and Millennials Have In Common & Why It's Important in Commercial Real Estate

By Charley Babb What do Baby Boomers and Millennials have in common? They both like to spend money. While they may spend their money on Read more

The Economic Benefits of Walkability

By: Brandon Wilhite Starting with the Federal-Aid Highway Act of 1956, the way cities were developed in the United States began changing. Although it was Read more

Brexit – Immediate Effect on Commercial Real Estate?

— By Sunny Sajnani In late June 2016, a historic referendum was voted on approving the British withdrawal from the European Union (EU).  The immediate Read more

Hotels: What Inning Are We In?

By: Justin Laub I recently returned from the Urban Land Institute’s national conference on hotels and resorts. The last time ULI held this event was Read more

Choppy CMBS Market Hoping For Resurgence

By Charley Babb CMBS issuance for the first quarter of 2016 was roughly half of the production for the same period in 2015. This has Read more

ground lease

Ground Leases-Friend or Foe?

On the surface, a ground lease seems like a simple concept: a landowner grants permission for a tenant to use their land in exchange for rent. This agreement seems easy to grasp, but if you look beneath the surface you will uncover some hidden details that often go unnoticed.

For starters, a ground lease allows the tenant the right to make improvements (e.g. build a hotel, retail shopping center, apartment complex, or even dig/drill) on land they do not own in exchange for annual rent. A typical lease term of a ground lease is between 50 to 99 years, with the tenant not only paying an escalating annual rent, but in most cases all the other expenses tied to the property. Ground leases have to be long term in nature to justify the tenant making improvements to land they will ultimately concede to the landlord upon the lease expiring.

Although it seems like there is not a lot of upside for the tenant, burdened by rent and other expenses to use land, there are a few benefits. For one, buying land can be expensive, especially when talking about development/acquisition deals in urban/populated environments. The ground lease agreement will enable the tenant to save upfront costs on land, which will free up capital for other expenses such as construction costs. Alternatively, maybe it is not a cost saving tactic, but simply the landlord is unwilling to sell a highly desirable parcel of land. Under this scenario, the tenant might be willing to engage because the project economics are too enticing to pass up.

The tenant will be saving costs upfront; however, over the long term, all these expenses attributed to a ground lease will most likely be higher than purchasing the land outright. Another disadvantage for the tenant is obtaining financing with an unsubordinated ground lease, because the landowner will have hierarchy of claims over the lender. The lender will not be able take control of the land upon default of the tenant, and therefore might lend less or not at all. Moreover, properties constrained with ground leases will continually lose value to reflect the landlord taking ownership of the improvements, as the lease gets closer to expiration. Lastly, the ground lease might be restrictive to how they develop the land or use it in the future, preventing the flexibility granted when the tenant owns the land free and clear.

Flipping the coin to the other party of the agreement, the landlord, also has upside and downside in entering a ground lease agreement. The first and most obvious advantage is the landlord still owns the land, making it a stable long-term investment, especially for family-owned land that needs to be put to economic use. Not only is the landlord collecting rent and most other expenses tied to the property, but the landlord is also benefiting from the appreciation in the land value as improvements are constructed on their land. Depending on how the lease is structured, the landlord might also retain control on how the land is developed in the future, requiring the tenant to seek approval before making dramatic changes to the property. Furthermore, renting out the land does not trigger a capital gains tax like it would during a sale; upon execution of the ground lease, no income tax event occurs until the landlord starts collecting rent.

While it might seem like the landlord is in the driver’s seat collecting rent with little to no downside, this isn’t entirely the case.  One big financial risk facing the landlord is the risk the borrower defaults on the loan. causing the landlord to lose the land, if the landlord is in a subordinate position to the lender.  Another down side for the landlord is that rent collected on a ground lease is taxed as ordinary income, which is taxed at a higher rate compared to the capital gains rate.  Lastly, borrowing against the equity built up in land under a ground lease can either be restricted or prohibited depending on the terms of the ground lease.

A ground lease agreement is more complex than initially meets the eye; therefore, obtaining financing for acquisition/development deals with ground leases can be difficult. Please contact any Senior Director at Metropolitan Capital Advisors to help you navigate the complex capital markets.

The Author, Andrew Hanzl, can be easily reached at Ahanzl@metcapital.com

Posted on by admin in Commercial Real Estate Finance Comments Off on Ground Leases-Friend or Foe?

5 Most Salient Points in Financing a Ground Lease

By Brandon Wilhite

ground-leaseAt Metropolitan Capital Advisors (“MCA”), a commercial real estate capital intermediary, we are continually tasked with assisting our clients in financing challenging projects.  Financing a ground lease, in which the lender’s mortgage is typically not secured by a fee interest in the real estate but rather by the borrower’s leasehold interest in the real estate, certainly qualifies as a challenging assignment as ground leases are notoriously difficult to finance.

A ground lease can be an effective way for a developer or end-user to gain long-term control of land (a “leasehold interest”) that a fee owner may otherwise not sell.  Such is the case when private property is being developed on public land that is not available for sale or when a private interest wants to retain long-term fee ownership in the land to eventually sell or, perhaps, to create an annuitized income stream to pass down a generation.  In fact, many holiday shoppers may be surprised to know that Northpark mall in Dallas was originally developed on a ground lease, as is the World Trade Center in New York (owned by the Port Authority).

While one could conceivably write a book (or a least a chapter or two) on the ins and outs of financing ground leases, we will just touch on the most salient points in this blog post.

First and foremost, as previously stated, the leasehold mortgage is secured not by the fee interest in the real estate but by the borrower’s leasehold interest in the real estate.  Therefore, in order for the ground lease to be financeable, it must have certain attributes that give a prospective lender adequate protection of its collateral.  In fact, the lender’s biggest risk is not a default by the borrowerbut a premature termination of the ground lease.  Such an occurrence would completely wipe out the lender’s collateral, giving it little recourse to recover the loss of principal.  It is, therefore, crucial that the ground lease give the leasehold mortgagee (the lender) rights and remedies similar to those afforded to real estate-secured lenders in the event of a borrower loan default.  The rights and remedies will typically include the right, without the landlord’s consent, to:

  • foreclose and sell the tenant’s leasehold estate and interests
  • assume the borrower’s lease
  • assign or sublease the assumed lease to a third party
  • cure the tenant’s default – ideally, the ground lease cannot be terminated by a default by the tenant that is curable by the leasehold mortgagee
  • enter into a new lease under the same terms and conditions as the original lease, if the ground lease is terminated by the landlord, so long as the leasehold mortgagee pays all back rent due

Additionally, in order for a ground lease to be financeable, it must have significant remaining term.  Lenders may require that the ground lease extend anywhere from 10 to 20 years beyond final maturity date of the loan so that the borrower will be able to refinance the loan at maturity.  In fact, in some states certain regulations will put requirements on the loan term as it relates to the remaining lease term  (i.e. ten years beyond the lease term or less than 4/5 of the remaining lease term).

Finally, in some instances it may be necessary for the landowner to agree to a subordinated ground lease in order for the prospective ground lessor to obtain the necessary financing, as opposed to an unsubordinated ground lease in which the leasehold estate is the primary security for the loan.  In a subordinated ground lease, the landowner allows the lender to place a lien against its fee simple interest in the land to secure the payment of the loan.  The lender will have a lien against both the fee simple interest in the real estate and the leasehold estate of the tenant.  In some cases, such as when the land is owned by a public entity (i.e. the Port Authority), this may not be feasible.

Although there are typically more hurdles associated with financing ground leases, so long as the lender is given rights and remedies similar to that of a real estate-secured loan, those hurdles can certainly be cleared.  If you have a ground lease in need of financing or refinancing, contact one of MCA’s Senior Directors to assist you in locating the best financing source. Or, if you would like, please fill out the form below, and we will contact you shortly regarding your financing needs of a ground lease or if you are needed a commercial real estate deal funded:

Posted on by Scott Lynn in Commercial Real Estate Finance 2 Comments