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Key Points: Financing Leasehold Interests in Real Estate

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May 4, 2015
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  1. Merely adding the word “leasehold” to your standard mortgage form does not create an effective leasehold mortgage.
  2. Scrutinize the underlying lease – often it is a ground lease. Does it:
    1. Allow the tenant to grant a leasehold mortgage?
    2. Have a term longer than the loan?
    3. If not, have extension options the lender may utilize?
    4. Have purchase options the lender may utilize?
    5. Have predictable rent?
  3. Check the title to the fee estate (landlord/owner) and not just the leasehold estate (tenant/mortgagor).  Assure the lease or a memorandum has been recorded.
  4. If the landlord’s/owner’s interest is subject to a mortgage, obtain a non-disturbance agreement which specifically addresses the leasehold mortgage situation.
  5. The lease cannot be permitted to “disappear”!  The lender must be able (under the lease or with the landlord’s agreement) to:
    1. receive notice of the tenant/borrower’s default;
    2. cure a tenant default and receive extra time to do so;
    3. obtain possession of the premises to cure; and
    4. receive a waiver of non-curable defaults (or a new lease).
  6. The potential responses to a bankruptcy filing by the tenant/borrower and by the landlord must be addressed – in the leasehold mortgage.
  7. Consider whether restrictive use provisions in the lease will diminish your collateral value (the lease) if you are forced to address a loan default.
  8. A leasehold mortgage can be enforced through foreclosure…but consider additional remedies: the granting of a new lease or the assignment of the lease to a new tenant.  The lease should have a “no merger” clause.
  9. Address the lender’s right to enforce the lease, consent to amendments, receive insurance proceeds, and obtain possession.
  10. Do you really want to take on the complexity of mortgaging a sublease?

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