ground-lease

# Ground Lease Agreement

Drafts a financeable ground lease governing long-term land use where the tenant constructs improvements on landlord-retained fee, with improvements reverting to landlord upon expiration.

## Prerequisites

Gather before drafting:

1. **Parties** — legal names, entity types, formation jurisdictions, addresses (landlord, tenant, any guarantor)
2. **Property** — legal description (metes and bounds, lot/block, plat), street address, county/state, title/survey exceptions
3. **Economics** — initial base rent, escalation method, rent commencement trigger, any percentage/participation rent
4. **Development** — intended use, improvement scope, construction timeline, target CO date
5. **Financing** — subordinate vs. unsubordinate to tenant's financing; anticipated lender(s)
6. **Special terms** — LOI/term sheet deal points, governmental approvals, institutional/public-entity constraints

## Agreement Sections

### 1. Parties, Recitals & Property

- Entity details; identify SPE structure and parent guaranty
- Recitals: fee ownership rationale, development intent, project scope
- Legal description controls over street address
- Appurtenant rights (access, utility, parking, signage); reservations (minerals, prior easements) carved out
- Address air rights / subsurface rights if bifurcated

### 2. Lease Term

| Element | Range | Notes |
|---|---|---|
| Initial term | 49–99 yrs | Based on financing needs and improvement useful life |
| Renewal options | 1–3 options, 10–25 yrs each | 12–24 mo notice; no uncured default; specify rent reset method |
| Commencement | Execution or conditions precedent | CPs: zoning, financing commitment, landlord delivery |
| Early termination | Rarely granted | If included: notice, fee, improvement treatment |

### 3. Rent & Escalation

Base rent typically 5–8% of appraised land value.

| Method | Key Points |
|---|---|
| Fixed steps | Interval (e.g., 5 yrs), step-up %, cumulative or not |
| CPI | Index (CPI-U), base period, interval, cap/floor |
| FMV reset | Dual appraisers, baseball arbitration, 12–18 mo notice, cost allocation |
| Percentage rent | Define "Gross Revenues," reporting, audit rights, breakpoint |

**Payment:** due dates, late charge (5% after 10–15 day grace), default interest (prime + 3–5%). Verify usury compliance.

**Taxes:** tenant pays all real property taxes (land + improvements) directly; annual evidence; may contest but must prevent liens on fee.

### 4. Use, Development & Improvements

**Permitted use:** reference zoning; broad enough for evolution but restrict environmental-risk uses and covenant violations.

**Construction milestones:** commence within 6–12 mo; complete within 12–36 mo; completion = CO or AIA substantial completion; failure triggers landlord termination right or rent acceleration.

**Improvement ownership:**
- During term: tenant owns, may depreciate and encumber via leasehold mortgage
- Expiration: revert to landlord without compensation (unless negotiated otherwise)
- Trade fixtures/equipment: removable if not affixed

### 5. Maintenance, Compliance & Insurance

Tenant responsible for all maintenance (structural and non-structural) to first-class comparable standard.

| Coverage | Limits | Requirements |
|---|---|---|
| CGL (occurrence) | $5M–$10M+ | Landlord additional insured; contractual liability |
| Umbrella/excess | As needed | Follow-form |
| Property (all-risk, replacement) | Full replacement cost | Landlord loss payee; include rent loss |
| Builder's risk | Full WIP value | Construction periods only |
| Workers' comp | Statutory | If employees on-site |
| Pollution liability | As appropriate | If hazmat operations |

Carrier: A.M. Best A- or better. Certificates annually; 30-day cancellation notice; primary and non-contributory; subrogation waived.

### 6. Casualty & Condemnation

**Casualty:** tenant restores (commence 60–90 days, complete 12–24 mo). Insurance proceeds in controlled disbursement against architect certifications. Tenant funds shortfall. Termination rights: damage in final [X] years, damage > [Y]% replacement cost, or insufficient proceeds.

**Condemnation:**
- Total taking: both terminate; landlord gets land value, tenant gets improvement value + leasehold bonus + business damages + relocation
- Partial taking: lease continues, rent adjusted proportionally, restoration applies

### 7. Assignment & Transfer

**Consent:** landlord required (not unreasonably withheld/conditioned/delayed); 30–60 day response; deemed consent if silent.

**Criteria:** net worth ≥ [X × annual rent], comparable operating experience, no prohibited use, audited financials.

**Permitted (no consent):** affiliate transfers (original tenant liable or transferee comparable), merger/consolidation to equal+ entity, leasehold mortgagee foreclosure.

**No recapture right** — inappropriate given tenant's capital investment.

### 8. Leasehold Mortgage Provisions

Critical for institutional financing. Include all:

- **Right to mortgage:** tenant may encumber leasehold + improvements without consent
- **Lender notice:** landlord sends all default notices to registered lenders simultaneously
- **Lender cure rights:** tenant's full cure period + 30–60 additional days (monetary); reasonable additional time for non-monetary defaults requiring possession
- **New lease right:** if ground lease terminates for tenant default, lender may elect (within 30–60 days) to receive new lease on identical terms, curing all defaults and arrears
- **Non-disturbance:** landlord won't disturb lender's security while lender performs tenant obligations
- **Foreclosure recognition:** landlord recognizes foreclosure sale purchaser as tenant upon assumption and cure

### 9. Environmental

- **Landlord reps:** no known contamination/violations at commencement (subject to Phase I disclosures)
- **Tenant obligations:** comply with environmental laws; permits; hazmat records; inspection access
- **Remediation:** tenant remediates tenant-caused contamination to regulatory closure; landlord self-help if tenant fails
- **Indemnification:** tenant indemnifies for environmental claims from tenant operations — **survives expiration**
- **Surrender:** deliver free of tenant-caused contamination; Phase I or regulatory closure evidence

### 10. Default & Remedies

| Type | Notice | Cure Period |
|---|---|---|
| Monetary | Written | 10–15 days |
| Non-monetary | Written | 30–60 days + reasonable extension if diligently pursued |
| Non-curable | Written | Immediate termination right |

**Landlord remedies:** termination; rent acceleration (subject to mitigation); self-help cure as additional rent; specific performance; damages.

**Tenant remedies:** damages; offset (perform and deduct); specific performance; termination only for material landlord breach.

### 11. General Provisions

- **Governing law:** property situs state
- **Disputes:** executive negotiation (30 days) → mediation (AAA/JAMS) → litigation/arbitration; carve out termination and injunctive relief
- **Jury waiver:** include with conspicuousness; confirm enforceability [VERIFY jurisdiction]
- **Notices:** simultaneous to lenders; certified mail + overnight + email
- **Recording:** memorandum/short-form (preserving economic confidentiality); include term, options, leasehold mortgage rights

## Checks

- Confirm leasehold mortgage provisions satisfy anticipated lender requirements (CMBS, life company, bank) before finalizing
- Resolve subordination vs. unsubordination early — fundamentally changes risk allocation
- Terms of 49 or 99 years most common; avoid century-crossing terms without careful renewal/reset mechanics
- If FMV rent resets at renewal, model scenarios and ensure dispute procedure (baseball arbitration preferred) is functional
- If landlord is institutional/governmental, confirm improvement reversion is consistent with accounting, tax-exempt status, or regulatory obligations
- State-specific: usury caps, jury waiver enforceability, recording requirements, landlord-tenant statutes — flag for local counsel
- Mark [VERIFY] on any statutory citation, index reference, or local law requirement not confirmed against current sources