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The fact is, sometimes land is simply not for sale. For many reasons ' ranging from local custom to estate planning to tax considerations ' the most desirable real property is often available only through long-term ground leases and is usually developed and subleased to retail tenants. The long-term ground lease turnkey sublease transaction (referred to in this article simply as the “Turnkey Sublease”) is thus a much-used device.
At first glance, the structure seems simple enough: The fee owner leases vacant land to the developer, who builds a store and subleases it to a retail subtenant. But deeper examination reveals complexities: 1) multiple lease negotiations must take place in close synchronization; 2) there are likely to be multiple lenders involved; and 3) both the fee owner and the subtenant need to be protected in the event that the developer goes belly-up.
The Turnkey Sublease structure brings together multiple parties with vastly different deal perspectives. The fee owner seeks protection of its ground rent income, as well as minimal risk and no obligations. The developer intends to pass through its ground lease obligations to its subtenant(s), receiving its profit (the building rent) with minimal risk. The sublessee seeks assurance that the ownership structure up the chain of title will have no impact on its rights and remedies. Lenders seek to fully preserve the value of their collateral and require all the standard mortgagee rights and remedies.
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