Ground Lease Financing: Commercial Building on Leased Land, Long Beach California

The Situation

A commercial property owner in Long Beach holds a leasehold interest in an 18,000 square foot office building situated on land owned by the City of Long Beach under a municipal ground lease. The structure is a two-story professional office building, well-maintained, with a tenancy that includes a mix of legal, financial services, and healthcare-adjacent professional office users. At the time this financing was arranged, the building was 96% leased, with in-place gross rents generating approximately $640,000 annually before vacancy and operating expense allowances.

Operating expenses -- property management, insurance, property taxes on improvements (note: ground leases often carry a separate tax structure on land versus improvements), utilities, and maintenance reserves -- totaled approximately 25% of effective gross income. Effective gross income, after a 4% vacancy allowance on in-place rents, was approximately $614,000. NOI was approximately $480,000. At a 7.0% capitalization rate applied to the leasehold interest, the appraised leasehold value was $6.8 million.

The ground lease had 42 years of base term remaining, with two 10-year renewal options, giving the leaseholder an effective tenure of up to 62 years if both options were exercised. Ground rent to the City was a fixed annual payment of approximately $110,000, already embedded in the operating expense figure above. The existing financing -- a 10-year fixed-rate bank loan originated a decade earlier -- had reached maturity. The owner needed to refinance.

The Challenge

The owner approached four conventional lenders: two regional banks, one national bank with a California commercial real estate presence, and a credit union that specialized in Southern California commercial real estate. All four declined. The reason in each case was the same, stated in slightly different language: "We do not lend on ground leases."

Understanding why requires understanding what a lender's collateral actually is in a leasehold mortgage. In a conventional fee-simple loan, the lender holds a deed of trust against both the land and the improvements. If the borrower defaults, the lender can foreclose and take title to both. In a leasehold mortgage, the lender's collateral is only the leasehold interest -- the right to occupy the land under the terms of the ground lease. The lender does not own the land and never will. If the borrower defaults and the lender forecloses, the lender steps into the borrower's shoes as lessee. But here is the problem: if the ground lease terminates -- whether because the borrower defaulted on ground rent, the lease expires, or the ground lessor (here, the City) exercises a termination right -- the lender's collateral disappears entirely. The lender would be left with a claim against a leasehold interest that no longer exists.

This is not a hypothetical risk. It is the reason most conventional lenders have a blanket policy against leasehold lending. The collateral is structurally different from fee-simple real estate, the legal documentation is more complex, and the lender's foreclosure rights are constrained by the terms of a lease they did not negotiate and cannot unilaterally modify. A bank with a standard credit policy and no ground lease underwriting expertise will decline every time, not because the deal is bad, but because the deal falls outside their box.

For this transaction to close, three conditions had to be met. First, a lender with genuine ground lease underwriting expertise had to be found -- one whose credit policy explicitly contemplated leasehold collateral. Second, the ground lease had to meet a set of structural requirements that sophisticated ground lease lenders have developed over decades of practice. Third, the ground lessor (the City of Long Beach) had to execute specific legal documents -- an SNDA and an estoppel certificate -- as a condition of loan closing. Obtaining those documents from a municipal entity is a process that cannot be rushed.

What Makes a Ground Lease Financeable

Not every ground lease is lendable. Commercial Lending Solutions evaluated the Long Beach municipal ground lease against the structural checklist that institutional ground lease lenders apply before they will issue a term sheet.

Remaining term test. The fundamental rule is that the ground lease term must extend beyond the loan maturity by at least 20 to 25 years, and most institutional lenders require the remaining term (including renewal options, if exercisable by the lessee without landlord consent) to exceed the loan term by at least 20 years. With 42 years of base term and two 10-year options, this lease had an effective maximum term of 62 years. Against a proposed 10-year loan, the cushion was 52 years at maximum term and 32 years on base term alone. Both tests were satisfied by a wide margin.

SNDA requirement. A subordination, non-disturbance, and attornment agreement (SNDA) is the document that protects the lender's position in a ground lease financing. The SNDA requires the ground lessor to give the lender notice of any default by the lessee, provides the lender a cure period to remedy the default before the ground lessor can terminate the lease, and requires the ground lessor to recognize the lender (or a foreclosure purchaser) as the new lessee if foreclosure occurs. Without an SNDA from the fee owner, no institutional lender will make a leasehold loan. The City of Long Beach, as the fee owner, had to execute this document. Municipal SNDAs require City Council approval or administrative authorization depending on the city's charter, and the process typically takes 60 to 90 days.

Estoppel certificate. The lender required an estoppel certificate from the City confirming the ground lease was in full force and effect, no defaults existed, the rent was current, and the remaining term was as represented. The estoppel is the lender's verification that the lease terms described in the loan application match the actual lease status as of the closing date.

Ground rent coverage. The lender underwrites NOI net of ground rent payments. In this case, ground rent of $110,000 was already deducted in the NOI calculation of $480,000. The lender's DSCR analysis runs on post-ground-rent NOI, which is the correct approach -- the lender needs to know whether the property generates enough income to service both the ground rent obligation and the mortgage debt service simultaneously.

Our Approach

Commercial Lending Solutions identified two lender categories with demonstrated ground lease underwriting experience: life insurance companies with dedicated commercial real estate loan portfolios, and CMBS conduit lenders who regularly originate ground lease loans for securitization. Both categories employ attorneys and credit officers who have handled leasehold financings and understand the SNDA negotiation process. Conventional banks were not a viable path and were not pursued.

We ran a competitive process among three specialty lenders: two CMBS conduits and one life insurance company. The life company offered the lowest rate but required a 15-year term minimum, which the owner did not want. One CMBS conduit declined during diligence based on concerns about the City's SNDA negotiation timeline. The second CMBS conduit issued a term sheet and remained engaged through the 78-day SNDA process.

The SNDA negotiation required one round of revisions. The City's initial form included a provision limiting the lender's cure period to 30 days after notice of default, which was below the 60-day minimum the conduit lender required. After one negotiating session involving the lender's counsel, the City's real estate division, and the borrower's attorney, the City agreed to a 60-day lender cure period with an additional 30-day extension if the lender had commenced cure and was diligently pursuing completion. That language is standard in institutional ground lease SNDAs and was acceptable to the lender.

The final loan structure was a 10-year fixed-rate CMBS loan at 65% of appraised leasehold value. At $6.8 million appraised value, 65% LTV produced a loan amount of $4.42 million. The loan was non-recourse to the borrower. The interest rate was 6.85%, fixed for 10 years, with a 30-year amortization schedule. Annual debt service on $4.42 million at 6.85% amortized over 30 years was approximately $347,000. Against NOI of $480,000, DSCR was 1.38x.

The Outcome

The loan closed approximately 105 days after the term sheet was signed -- longer than a conventional refinance, but within the timeline Commercial Lending Solutions projected at the outset. The extended timeline was driven almost entirely by the SNDA negotiation with the City. The borrower's existing lender granted a 90-day maturity extension to accommodate the process, which was secured at the outset of the engagement rather than at the last minute.

The borrower achieved a 10-year fixed rate, non-recourse loan at a rate and DSCR that would be competitive for a comparable fee-simple office building in Southern California. The leasehold structure imposed no pricing penalty relative to fee-simple comparables at this loan size and LTV -- the market had priced the remaining ground lease term and the SNDA protection as adequate risk mitigation. The borrower retired the matured bank loan, eliminated recourse exposure, and locked a fixed rate for a decade.

The four banks who declined were not wrong that leasehold lending is complex. They were wrong that complexity means unavailable. The correct answer was not a different type of conventional lender. It was a different type of lender entirely.

Key Takeaway

Ground lease financing is a specialty within commercial real estate lending that most borrowers encounter unexpectedly: they own an operating building, the financing matures, and they discover the leasehold structure has narrowed their lender universe to a fraction of the market. The path forward is not to approach more conventional banks and hope for a different answer. It is to identify lenders -- life companies and CMBS conduits specifically -- whose credit infrastructure was built to accommodate leasehold collateral, and to engage them with a ground lease that passes the structural tests: remaining term, exercisable renewal options, and a ground lessor willing to execute an SNDA on terms acceptable to an institutional lender.

The SNDA negotiation is the critical path item in any ground lease financing. Borrowers who have not begun the SNDA process before approaching lenders will face a gap between term sheet issuance and loan closing that can create maturity default risk on existing financing. Engaging a broker who has managed this process before -- and who can project the timeline accurately at the outset -- is the difference between a smooth refinance and a distressed maturity extension.