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Using Ground Leases in a Difficult Economy

By Steven Simkin and Barry Langman

A common ownership arrangement in large metropolitan areas such as Manhattan, though perhaps little-known to the public, involves the use of a ground lease. The apparent owner of the property ' the landlord of an office building, the business owner at a retail location or even the cooperative corporation at a co-op apartment house ' may not in fact hold the fee interest at all, but may instead hold the lessee interest under a ground lease.

Ground lease transactions are typically characterized by a long-term lease of land that is undeveloped at the time of lease execution, or of land that contains improvements that are intended to be demolished to permit redevelopment. The term is typically 75 or 99 years, which is long enough to approximate or exceed the useful life of the improvements the ground lessee intends to construct on the property. Further mimicking actual ownership by the lessee, ground leases are triple-net, with the ground lessee fully responsible for taxes, insurance and operating expenses, as well as having considerable discretion over alterations and management at the property. A “financeable” ground lease will also accommodate the ground lessee's obtaining a leasehold mortgage, balancing the lender's requirements for secure collateral with the owner's concern that its fee position not be subordinated to the lessee's financing.

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