Ground Lease
Ground Lease in Practice
An investor owns the leasehold interest in an office building sitting on a ground lease with 62 years remaining and $250,000 of annual ground rent. The building generates $1,450,000 of NOI before ground rent, so the leasehold NOI available to service debt is $1,450,000 - $250,000 = $1,200,000. A lender offering a 10-year leasehold mortgage is comfortable on term, since 62 years far exceeds the loan, but sizes the loan off $1,200,000, not $1,450,000, and stresses any future ground rent resets.
Ground Lease: What the Market Actually Requires
The structural fault line is whether the ground lease is subordinated or unsubordinated. In the standard unsubordinated structure, the landowner never pledges the fee, ground rent effectively sits ahead of the leasehold mortgage, and the lender's collateral is the lease itself. That makes the lease document the credit. The second fault line is rent escalation: fixed bumps and CPI-linked increases can be modeled, but fair market value resets, where a future appraisal resets ground rent to a percentage of then-current land value, are the classic proceeds killer because no underwriter can size around an unknowable future expense.
Leasehold financing then comes down to two tests. Remaining term versus loan term: lenders want the ground lease to run well past loan maturity, with 20 or more years beyond maturity a common institutional convention, and many require the lease to outlast the full amortization schedule, so a loan with 30-year amortization effectively needs 50-plus years of remaining term. CMBS and life insurance companies are the strictest; banks and debt funds show more flexibility at lower leverage or shorter amortization. Leasehold mortgagee protections: a financeable ground lease must give the leasehold lender notice of defaults and the right to cure, prohibit termination or amendment of the lease without lender consent, grant the lender a new lease on identical terms if the ground lease is rejected in bankruptcy, and allow foreclosure on the leasehold and assignment without landlord approval. A ground lease missing these provisions gets amended before closing or the deal dies.
Two practical notes. Leasehold positions trade and finance at wider cap rates than fee interests, and the discount steepens non-linearly as remaining term burns down toward the amortization horizon. And ground leases cut both ways for investors: selling the fee under your own building is a capital markets tool that raises proceeds today, but every year of term you give up is leverage a future leasehold lender will take back.
Why It Matters for Your Loan
On a leasehold deal, the ground lease is the collateral, and its terms set your proceeds, amortization, and lender pool before the building's cash flow is even discussed. Insufficient remaining term, fair market rent resets, or missing mortgagee protections can shrink the buyer and lender universe to a fraction of the market. Commercial Lending Solutions reviews the ground lease first, flags the provisions that need amending, and matches leasehold financings to the lenders that actually close them.
Related Terms
Ground Lease: FAQ
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