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Criteria for Financeability

By Joanne Feil
May 30, 2006

Among the many real estate assets that may be financed are ground or net leases. Despite many changes in the area of real estate finance over the past number of years, the legal criteria for determining financeability of a tenant's leasehold estate remain constant. Nevertheless, it is useful for the real estate practitioner to periodically take inventory of the standards. Certainty of leasehold financeability is essential, not only to any ground lessee or tenant that wants to finance the cost of constructing its leasehold improvements, but also to any tenant that decides to finance a portfolio of leasehold properties or whose corporate lender requires a collateral assignment of the tenant's interest in its leasehold estates as part of the security for a broader, corporate financing facility. The following sets forth fundamental issues to be considered in determining the financeability of a significant lease.

Mortgaging

The lease or a memorandum of the lease must be recorded in the applicable land records. The lease must specifically permit a mortgage of the tenant's leasehold interest and the right to foreclose the same. In addition, if there are restrictions on the leasehold mortgagee (eg, 'institutional lender,' size of mortgage loan, restriction on cross-collateralization), the leasehold mortgagee must be able to satisfy these criteria, and the mortgage, once made, must be freely assignable.

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