There are usually two different types of basic rentals: subordinates and non-subordinate. Among the critical elements to consider and negotiate in the case of a land rent are: a basic tenancy agreement is a contract by which a tenant may, during the rental period, develop a land under which the land and all improvements are handed over to the owner of the land. The duration of a development lease agreement must be long enough to give the developer-tenant sufficient time to qualify, build and operate the project, so that it is economically attractive to enter into the lease. A lender for the developer and tenant will also have a great interest in the duration of the term, as this will have a direct influence on the value and strength of the lender`s security, which consists only of the tenant and not the interest of the owner of the land. Lenders require at least that the amortization period of the loan be significantly shorter than the remaining lease period. For example, if a loan is depreciated over a 30-year period, the lender may want a lease term of at least 40 years. The longer the granting of a credit during the lease period, the shorter the repayment period and the higher the payment of the debt service. From a certain date, the lease will no longer be fined. The variations on these subjects are endless. For example, the tenancy agreement might consider a minimum rent plus the percentage rent.
The percentages may vary depending on the different uses authorized by the basic lease. The entire negotiation takes place as part of an attempt to ensure that the basic tenant and his tenant can reasonably project the basic rent into the future, so that the lender can provide and maintain a necessary coverage ratio for debt service. Uncertainty about the projection of future rent percentages, or the uncertainty of proposing new rent assessments, may result in a decrease in loan revenues for the developer, or even a non-financeable lease. Developers sometimes offer a formula based on a percentage of gross revenue or another measure of the financial performance of the property. This type of rental structure protects the tenant from having to pay non-economic rent and therefore has a theoretical logic and equity. In practice, however, it can be very complex to structure. The owner should be concerned about the potential to play the system and the possibility that the developer makes stupid decisions. In the meantime, the developer should be concerned about the good recognition of his initial (and future) investment in the property in order to maximize gross revenues for the common benefit of the parties.