Utilizing Ground Leases When Considering Financing

Chatted with Robyn King a few days ago about ground leases relating to financing issues and how some SBA lenders look at this issue. This is what she had to say about this issue:

"One area  of expertise I have is doing franchise lending utilizing ground leases. There are no more moving parts than in a transaction like this. For those that are not aware of ground leasing, it is a type of transaction that occurs when a land owner wants to retain ownership of the land and lease the property to a business owner. The business owner will be constructing a building on the property for a specified period of time. It may be thirty to forty years or longer. Many lenders will not like to participate in a transaction like this, because the collateral is poor. It is essentially a constructed building with no land.

Most borrowers would prefer to own the land but have to get involved in this type of transaction when land prices have soared or land is scarce.  When you find yourself in this situation, you need to negotiate well.  If it is a franchise transaction, you will have a franchisor to deal with, a land owner, a banker, an equipment vendor, a title company, an appraiser, several attorneys  and a host of back office personnel so you need to understand each player's plight and how to handle them.

After you find an experienced  lender who understands what you are doing, you will need to put both parties (the lender's legal counsel and the landlord's legal counsel together before you proceed with the construction and the funding.  Many borrowers do this at the end of the game only to find out that there are insurmountable problems that will cause the deal to faulter.  Always get in writing what each party is willing to do, so you won't be left empty handed at the end of the deal.  You will need to know what a leasehold estate is and how it effect the land owner's property.  Remember anything can be accomplished but you need to know how to approach the situation."

Categories: Deal And Escrow Issues, Franchises For Sale, Small Business Financing