Ground Leases



If the developer does not purchase the real property on which the algae biofuels facility will be constructed, the developer will typically enter into an agreement to use the property for the project (a “ground lease”) with the owner.  If the property has already been developed, demolition of the current improvements may be necessary.  This section provides a brief description of issues that the developer should consider in negotiating a ground lease for the construction of a facility.

Term

A ground lease will frequently have a relatively lengthy term (e.g., 20-50 years).  In negotiating the term of a ground lease, the developer should consider including options to extend the term of the lease and to use other real property adjacent to the facility (if such use becomes necessary and such property is available).  In some midwestern states leases of agricultural land for more than ten or twenty years are prohibited by statute and constitution and care must be used in structuring an appropriate land use agreement.

Use

The “permitted use” for the property should be broad enough to allow the developer to construct, maintain, and operate the algae biofuels facility in a practical and flexible manner.  The owner will frequently propose that certain activities not be conducted on the premises, such as illegal or hazardous activities.  Any proposed restrictions should be reviewed to ensure they do not restrict the developer from constructing and operating the facility or carrying out any future plans.

Lender Protection Provisions 

The vast majority of projects need financing from a commercial bank or other third party to finance the construction of the facility.  Most lenders will demand extensive protective provisions in the loan documents before agreeing to lend with only the ground lease as collateral.  The developer should do its best to anticipate what protections will be requested (or demanded) and obtain the landlord’s consent proactively to modify the lease to incorporate the lender protection provisions.  The right to mortgage or otherwise encumber the leasehold interest should be included in the ground lease. 

Access and Interference by the Owner 

A ground lease will frequently permit the owner to enter onto and inspect the premises.  The developer should consider limiting the owner’s access to the premises, however, because it may be dangerous for the owner to enter onto the premises unexpectedly.  An algae biofuels facility will also want to maintain biosecurity precautions with all visitors, including the owner.  Accordingly, the owner’s access rights should be limited to defined times and purposes and should require prior notice to the developer. 

Rent

Rent under a ground lease may be payable monthly, yearly, or in other intervals.  Rent may be a fixed amount or a variable amount (e.g., based on a percentage of the developer’s sales or gross revenues).  The developer should determine which schedule and method for determining the amount of rent is appropriate.  In addition to basic rent, the developer will typically be responsible for all construction, maintenance, and insurance costs associated with the facility and all utilities and real estate taxes.  If the facility is constructed on property where common areas are shared with other tenants, common area charges may also be included in the rent.

Construction  

A ground lease will frequently contain construction criteria and standards, and will often provide the owner with the right to approve various stages of the construction.  The ground lease should provide the developer with the maximum amount of flexibility in constructing the facility and should limit, to the extent possible, the owner’s right to approve the construction of the facility.  After the construction of the facility is complete, the developer should also have the ability to maintain, alter, or modify the facility at its discretion without the consent of the owner. 

Condemnation 

It is always possible that a governmental entity with the power of eminent domain could condemn the real property on which the facility is being constructed.  Upon condemnation, the owner will be awarded the fair market value of the real property, including the value of any improvements.  The developer should insist that the ground lease specify that the portion of the condemnation award related to the facility or other improvements will be paid to the developer.  In addition, the developer should be compensated for the value of the remaining term of the ground lease. 

Site Security 

If the owner is to provide a secure premises for the construction of the facility, the ground lease should specify the owner’s duties in this regard. The developer should also consider including the right to build a fence around the facility and to monitor access by the owner or third parties.

Insurance 

The ground lease may require the developer to maintain general liability insurance and possibly all-risk property insurance for the full replacement value of the facility.  The amount of this required insurance should be reviewed with the developer’s insurance company.  If the facility is constructed on property where common areas are shared with other tenants, the ground lease should specify that the owner will be responsible for maintaining the requisite insurance for the common areas.

Assignment and Subletting

A ground lease will frequently restrict the developer from assigning or subletting the facility without the consent of the owner.  The developer should consider negotiating exceptions, such as permitting an assignment or sublease to a financially sound tenant.  In addition, if a corporate restructuring of the developer is a realistic possibility, the developer should have the right to assign the ground lease to an affiliate of the developer without the consent of the owner.  As a general rule, an assignment or sublease will not relieve the developer of its obligations to the owner under the terms of the ground lease.

Environmental Issues 

The ground lease should include representations by the owner that there are no environmental liabilities existing on the real property.  The ground lease will require the developer to agree that it will not violate environmental laws or use hazardous substances in a manner that is inconsistent with environmental laws.  The ground lease should not, however, completely prohibit the use of hazardous substances on the property (provided the use does not violate environmental laws or regulations).

Title

The ground lease should require the owner to deliver a title insurance policy insuring the leasehold interest in the property.  Title to the facility and all other improvements constructed on the property should remain vested in the developer throughout the term of the ground lease.  At the end of the lease term, the developer should have the right to remove the facility and all other improvements from the property.  In the alternative, the developer may reserve the right to demolish the facility at the end of the lease term.

Indemnification

The ground lease will typically require the developer to indemnify the owner for any loss or injury suffered by the owner in connection with the developer’s use of the property.  The ground lease also should require the owner to indemnify the developer against any injury or loss suffered by the developer in connection with the owner’s entry onto the property.


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