Greek Housing Deal Structures
Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.com
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October 22-25, 2015
Dallas, TX
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October 22, 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
•
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
•
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.
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.
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.
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.
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.
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
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Premises –
GROUND!
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Rent/Additional Rent
•
Term
Why A Ground Lease
Landlord Perspective
•
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
•
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
•
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
•
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?
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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?
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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?
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Revenue Ruling 60-367, 1960-2 C.B. 73
•
PLR-110977-99
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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?
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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?
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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?
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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?
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"any lawful purpose. . . "
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Restrictions limit avenues available to
recover value from collateral
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A narrow use restriction can severely
impact the financeability of a ground
lease.
Is My Ground Lease Financeable?
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Lender will want right to exercise renewal options . . .
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Same applies to purchase options
Lender may decide to go ahead and buy out
owner.
Is My Ground Lease Financeable?
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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?
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R
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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?
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B
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Lease must allow for recording of at least a
memorandum of lease
Lease should allow each party to request
estoppel certificates
http://fraternallaw.com/wp-content/uploads/2015/07/FEA-2015-Annual-Meeting-
Ground-LeasesFINAL.pptx
Sean P. Callan, Esq.
sean.callan@fraternallaw.com
(513) 763-6751
www.fraternallaw.com
Explore the nuances of ground leases, financing, and deal risks in Greek housing arrangements with Sean P. Callan, Esq. Learn about common deal structures, inherent risks, and considerations for owning, leasing from private landlords, and leasing from host institutions. Gain insights into the complexities of Greek housing agreements and strategies for mitigating legal, financial, and operational risks.
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Presentation Transcript
Sean P. Callan, Esq. sean.callan@fraternallaw.com (513) 763-6751 www.fraternallaw.com
National Panhellenic Conference 2015 Annual Meeting October 22-25, 2015 Dallas, TX
Ground Leases and Financing October 22, 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 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 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.
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.
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.
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.
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 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 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 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 Collateral at risk tenant default. Ratings standards - term. More difficult to document. Not typically preferred over fee. More difficult to foreclose/sell.
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?
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
http://fraternallaw.com/wp-content/uploads/2015/07/FEA-2015-Annual-Meeting-http://fraternallaw.com/wp-content/uploads/2015/07/FEA-2015-Annual-Meeting- Ground-LeasesFINAL.pptx
Sean P. Callan, Esq. sean.callan@fraternallaw.com (513) 763-6751 www.fraternallaw.com
