Leasehold Financing Demands Particular Protective Provisions

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Construction and permanent financing of development projects on leased land can pose unique challenges for lenders. Most of these challenges can be better understood if the ground lease is perceived as a senior financial obligation with priority over the project lender's mortgage or other security interest in the property.

Under leasehold financing - which is a form of equity financing - in lieu of purchasing the land, the developer incurs a long-term ground-rent obligation to the landowner, and the owner retains the right to terminate the lease if the ground rent is not paid.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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